I remember once commenting about how smart I was because the returns on my portfolio were high. About a year later I came down to earth and learned my lesson.
This doesn't mean we shouldn't try to earn as much as we can. it doesn't mean we should chase past earnings or the hot new trend. But it does mean we have to understand risk.
The baseline of risk tolerance is related to inflation. If the value of the currency is going down by 2-5% a year, then that is the target you have to meet just to break even.
Granted, there is a time to stuff money in the mattress, so to speak.
But for most of us, we need to see growth in our investments throughout our working career in order to have a comfortable retirement. There is no way to do this without risk.
For example if you put 10% of your salary into an index fund which tracks the S & P 500, then roughly you would make 10-11% a year. However appealing that average return may sound, the road is bumpy. When things fall apart and the stock market drops significantly, no one - literally no one - can tell you what is going to happen. People can talk about historical averages or repeat "the market always comes back," but none of this makes it an easier. There is no guarantee; there is only historical trend.
And we tend to forget that these stocks are tied to actual companies, and actual people are making decisions about how much risk to take. And sometimes it doesn't go well. Sometimes they are wrong, just as we are. Sometimes things happen which no one could have predicted.
So what should we do? Don't run from the risk, but mitigate it.
The best way to manage risk in your investments is to diversify. Decide - by your own research or with the help of an advisor - how much risk you can reasonably maintain. Can you sleep at night? Will the return you expect help you reach your goals? How is your overall financial situation? There are many things to consider, and each person is unique.
But there is no alternative for most of us who are working and saving for the future.
Copyright 2023 Personal Finance Reports. All Rights Reserved. No part of this content may be reproduced or used in any manner without prior written permission.
Disclaimer: The views expressed on this website reflect the personal opinions and experiences of the writer. Nothing in this article constitutes financial advice in any way. Information on this website should not be relied upon for investment or business advice. Please consult with a qualified financial professional before making any financial decisions. 3800290