Balancing Investor Risk and Reward

The risk/reward concept states that the higher the risk of a particular investment, the higher the possible return. Although there usually is some risk with any equity investment, assessing just how much risk your portfolio should carry is essential. Risk involves the potential for gain or loss of monies invested.

 

Many people take on more risk, hoping to achieve a higher return without regard to cyclic markets. Investors expecting higher returns based on past experience must understand that markets can go through both gain and loss periods.

 

In theory, many assume that the higher the risk, the more you should receive for holding the investment. With cyclic markets, this is only sometimes true. Conversely, in theory, the lower the risk, the less you should receive. Unfortunately, the dilemma is this: a higher potential for above-average returns comes with a higher risk of below-average returns. Conversely, safer investments, such as cash and bond instruments, have a lower potential for high yields coupled with a higher potential to not keep up with inflation.

 

Different types of securities have associated levels of risk. While choosing investments for your portfolio, you must be conscious of risk/return trade-offs and risk tolerance. Every investor’s goal should be to find a balance that allows you to not experience undue anxiety in the markets and simultaneously achieve your long-term financial goals.

 

It is wise to consult with your advisor if you have questions about investing.