When you make an investment, you risk the possibility that the value of your investments will go down or remain unchanged over time. Some investments are more risky than others. Generally, the more risk you’re willing to take, the greater your opportunity for reward over the long term.
There’s not a simple formula to follow to determine how much risk is worth taking; only you know how much or what kinds of risk you’re comfortable with. What’s more, your willingness to accept certain levels of risk will probably change during your lifetime.
Start to determine your comfort level with risk by asking yourself two questions:
1. What are my retirement goals?
The more specific you are, the easier it will be to determine the level of return you’ll need and the level of risk you’ll need to accept to potentially reach those goals.
2. When do I want to retire?
If retirement is a long way off, you might consider more aggressive investments. A span of several years gives you the opportunity to ride out the ups and downs of a number of market cycles. But if you’re close to retirement, you might want to shift to investments with lower risk. In either case, talk to a financial professional to see what makes sense for your situation.
Next, you’ll need to evaluate your investment options. Most investments fall into one of three broad categories:
- Stocks and stock funds — Historically, these have offered the highest potential reward but tend to have the highest risk and are more appropriate for long-term investors.
- Bonds and bond funds — These typically present less risk than stocks but generally have less growth potential than stocks.
- Cash alternatives — This category includes money market funds, or stable value funds, and offer the least volatility. Investors generally use them to help preserve what theyve invested.