The Nature of Risk and Reward
Every investment carries some risk. However, it’s a misnomer to think that the bigger the risk you take, the bigger the reward you’ll receive. This may be especially true for those who are near or already in retirement.
Consider the story of the tortoise and the hare. The tortoise pursued a slow but steady pace to the finish line, while the hare took off at breakneck speed but got waylaid and finished behind the tortoise. It may be a fable, but investments can work the same way – particularly for pre-retirees who start making larger contributions to retirement investment accounts after they’ve bought their homes, raised their kids and paid for college. However, assuming higher risk may not be the best way to make up for lost time. Just because you start late doesn’t mean you should sprint to the finish.
For example, let’s say investors A and B each invest $100,000 for five years. Investor A earns 7 percent for four years on her moderate growth portfolio, then only 1 percent in the fifth year, for a total of $132,391. Investor B invests more aggressively for a 10 percent return in each of the first four years, but his portfolio return drops to a negative 10 percent in the final year. He ends up with $131,769. Not only does investor B take on more risk, but he ends up with less money than investor A. Investor A receives essentially the same return on her investment without as much concern for loss, because she has taken less risk.
Pre-retirees may be tempted to invest in riskier assets with the potential for higher returns because they need their portfolio to yield a certain amount of money to reach retirement goals. However, a higher average annual return usually means exposure to more risk, and this may not be the optimal way to achieve your financial goals.
Depending on your retirement goals, slow and steady can help get you where you need to go with less concern for volatility with investments. We can help you determine your capacity for risk and then work with you to create a financial plan that takes into account your tolerance for risk.
This hypothetical example does not represent any product and is for illustrative purposes only. It should not be deemed a representation of past or future results, and is no guarantee of return or future performance. Contact us at firstname.lastname@example.org or call us at (952) 460-3260 to schedule a time to discuss your financial situation and the potential role of investments in your financial strategy.
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