The Right Mix of Risk and Reward

The Right Mix of Risk and Reward

Use too much oil or vinegar and your salad dressing won’t be a taste sensation — the right balance of ingredients is important. Striking a balance is something you do everyday, in many ways. Balance is also a key factor when you make decisions about investing your tax-deferred retirement savings.

Some people are comfortable putting all their money into funds or portfolios with low risk and low potential returns. Others invest all their money in high-risk funds or portfolios with high potential returns. Striking a balance between these two strategies may result in the right mix of risk and rewards for you. But how do you choose that mix? Here are some guidelines that may help, but keep in mind that diversification and asset allocation strategies do not assure or protect against loss, they are strategies to help do so, not guarantees.

Context Counts

Each of your investment options has a certain level of risk and potential return. Those factors are important — but don’t stop there. Context counts when you invest your retirement account. An investment by itself may be too risky or offer too low a potential return, but may be just right within a mix of different investment types. Including higher-risk investments may help to increase your potential overall return, while adding low-risk investments might reduce the chance of overall loss when higher-risk investments perform poorly.

Think Long Term

Short-term price volatility is a normal part of investing. You can expect the values of your stock and bond portfolios to move upward at times — and downward at times. When you track your returns, keep in mind that both stocks and bonds have a history of growth over long time periods. That history, of course, is no guarantee of future returns. Whenever you sell an investment, its value may be lower than the amount you invested. Still, time is typically on your side if you choose a well-balanced investment mix with the potential for long-term growth and stick with it.

Don’t Ignore Inflation

Low-risk investments reduce your account’s volatility. But investments with low risk usually also have low returns that may not beat inflation over the long term. Inflation plus low growth is a recipe for a plan account balance at retirement that may not be large enough to meet your needs. To counter this real risk, you may need to choose a combination of portfolios that has a level of overall risk you can live with while offering the potential for rewards that exceed the rate of inflation.

Call us at (575) 769-3965 to help you review your asset allocation and reassess your portfolio to help you achieve your financial goals.