Perhaps it was Confucius who said, “Nothing ventured, nothing gained.” Investing for the future is always a game of chance and risk-taking is part of the game plan. The goal is to make your money grow—keeping ahead of inflation, using interest rates to your advantage in saving and borrowing, riding safely through the ups and downs of stock market and real estate cycles. The secret is to be a wise risk-taker and find the right balance for you between hopeful excitement and sleepless nights.
All investing involves some element of risk. The types of investments you choose should be determined by your risk tolerance—that is, how much risk you’re comfortable with—as well as other factors, such as your time horizon (how long you have until you need the money), current income, and future spending needs. It is better to invest wisely and accept smaller gains each year than to put all your money into a risky investment, hoping to make a killing too quickly.
When you invest, you face three basic types of risk: Market risk is the possibility that your investment (stocks and real estate) will lose value due to market shifts. Interest rate risk (such as you encounter with bonds) is the risk that a change in interest rates will hurt your investment. And everyone faces inflation risk—the possibility that rising inflation will erode the purchasing power of your dollars faster than you can accumulate them.
While it’s natural to fear risk, it helps to understand exactly what risks you are facing. An African missionary tells the story of watching a pride of lions stalking a herd of gazelles. The lions silently surrounded the gazelles and then two old, toothless lions gave a ferocious roar. The frightened gazelles stampeded away from the roar and straight into the mouths of the younger waiting lions. Don’t be so afraid of making investment mistakes that when the toothless lion of the stock market roars, you run in the opposite direction. Stashing money in low-interest savings accounts may feel safe but leaves you vulnerable to the risk of inflation eating up your dollars.
We’ve found that investing stymies many clients, especially women, because they are searching for the perfect investment. Unfortunately, the perfect risk-free investment isn’t out there. The good news is that you don’t need to search for the one best investment. A diversified portfolio of multiple types of investments that respond differently to changing economic factors can reduce risk and help you reach your financial goals. Keep an eye on the long-term prize and feel less stress over the short-term ups and downs.