What is your appetite for risk? Investing is a risky business. Understanding the different types of investment risk and the impacts they play on returns is critical for planning a successful, long-term investment strategy.
Many prospective investors eventually shy away from a commitment when they hear the dreaded “R” word: risk. By itself, risk is innocuous, carrying no special meaning or predictive result. But the idea that investing one’s money is not foolproof; that there are risks involved, and that a return is speculative — the very idea is enough to burrow one’s savings into a secure bank account that earns a predictable interest rate (never mind that the figure is minuscule by any metric).
But not all risk is created equal. There’s “letting it all ride” on a long shot and then there’s deliberate, a calculated risk that is associated with sustained, long-term growth. Understanding the different types of risk is essential to evaluate whether an investment strategy aligns with your financial goals.
Risk and Return: A Closer Look
I’m talking today about three main types of investments: stocks, bonds, and cash investments. Let’s take a look at each:
Stocks
Stocks typically carry a great level of market risk, and the highest potential for losing money in the short term. However, when looking at the long-term performance of the stock market, stocks have historically outperformed bonds and other cash investments. With this in mind, consider allocating assets that you intend to invest for 10-plus years into stock investments.
Bonds
Bonds carry multiple risks: interest rate risk, which impacts a bond’s price; and credit risk, which applies to the bond issuer and the possibility of default. Interest rate changes impact bond prices more significantly than they do stock prices. When short-term rates increase, investors can therefore sell older bonds that carry a lower interest rate, which in turn leads to price reductions, favoring investing in newer bonds that pay higher rates. Overall, bonds have historically been more stable over the short term than stocks.
Cash Investments
Finally, cash investments such as 3-month treasury bills are typically less volatile than both stocks and bonds. However, they may not keep pace with inflation. For this reason, you may consider these cash investments for short-term situations, such as those when you intend to access your money within the year.
A Broader Context, a Clearer Understanding
With the above in mind, assess your investments — stocks, bonds, and cash investments — in terms of a risk profile that aligns with your current and future goals. By investing in different types of assets, you minimize the collective risk of each while increasing your chances of reaping any potential benefits.
No investment portfolio will be risk-free, but taking these calculated risks can help you temper your losses.
Want to Learn What Is Your Appetite for Risk?
Call Chris Kaminaka at 808.218.6268
ChrisKaminaka
Financial Advisor
Pearl Hawaii Wealth Advisors
Located at: Pearl Hawaii Federal Credit Union
94-449 Ukee Street, Waipahu, Hawaii 96797 Phone808.218.6268 | Emailchris.kaminaka@LPL.com
Check the background of this investment professional on FINRA BrokerCheck.
As a LPL Financial Advisor, Chris is qualified to provide credit union members with professional assistance, quality financial products, and dependable service. Chris is a Registered Representative of LPL Financial, a broker/dealer with a select portfolio of securities products, such as mutual funds, and a member of FINRA and SIPC. Chris is also a licensed insurance agent. It’s easy to get started. Please contact me for a no-cost, no-obligation consultation.
*Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. Pearl Hawaii Federal Credit Union and Pearl Hawaii Wealth Advisors are not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using Pearl Hawaii Wealth Advisors and may also be employees of Pearl Hawaii Federal Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, Pearl Hawaii Federal Credit Union or Pearl Hawaii Wealth Advisors. Securities and insurance offered through LPL or its affiliates are:
Appetite for Risk
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
This material was prepared by LPL Financial, LLC
Disclosure: Tracking #1-05078068, Exp. 11/2022
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