Friday, November 16, 2012

The Truth about Risk

No doubt you've heard there's no reward without risk. That's as true of investing as it is of anything else in life.

Historically, each of the three major investment asset classes—stocks, bonds, and cash—has produced pretty consistent long-term returns, along with pretty consistent degrees of risk. Understanding these historical patterns can help you handle risk in your own portfolio.
Research done at Vanguard has shown that getting your asset mix right can have more impact on your long-term returns than anything else—it's even more important than the individual investments you choose.
How to strike a balance

For investors, risk comes in many forms. There's the risk of a downturn in stock prices. There's the risk that inflation will erode an asset's purchasing power. There's the risk of political instability affecting international markets. And so on.
How to strike a balance
For investors, risk comes in many forms. There's the risk of a downturn in stock prices. There's the risk that inflation will erode an asset's purchasing power. There's the risk of political instability affecting international markets. And so on.
Achieving long-term financial goals means accepting the trade-off between risk and reward, and understanding the historical patterns that have gone along with the three primary asset classes. Stocks, historically, have offered higher long-term returns than bonds or cash, but they've also carried more risk. Bonds have offered higher returns, with more risk, than cash. Cash has provided a measure of stability, but money that's stuffed in your mattress nets zero return and will probably fail to keep pace with inflation. Paradoxically, taking a conservative approach to market risk may expose you to a high degree of purchasing power risk.
Fundamentally, how you allocate your assets among stocks, bonds, and cash depends on how much risk you're willing to take for an expected return. And that depends on why you're investing, and when you need your money.
So, what's the right way to divvy up your portfolio? You'll need to answer three basic questions:  Read more... and try the How asset mix historically affected volatility calculator
For help in setting up a proper asset mix for yourself, e-mail or call us

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