Choosing investments can be an intimidating prospect. After all, how can you discern which funds are the best fit for you and your short and long-term financial goals? When trying to decide, what may first be fruitful to consider is your feelings on risk and return.
Risk and return vary significantly based on which investments you choose. An investment that has a high volatility, changing rapidly and in large chunks over time, is usually considered high risk. An investment that shows very little change up or down over time is considered to be on the low end of the risk spectrum.
If the potential to lose so much all at once is high on a high risk investment, why choose it? Often, the potential for high returns is alluring, and something a safe investment like a government bond will never offer. In addition, investors with more time to remain invested have the chance to recoup losses over time by waiting until the next rise in price before leaving high-risk investments.
On the other side of the spectrum, you may wonder why an ultra-stable investment would be attractive to some investors when the returns trend low. For those who have less time to wait out a market downturn, low-risk investments are a wonderful way to ensure accrued capital is still performing while also protecting against a sudden loss that leaves the investor penniless with no time left to make their money back.
How, then, are you supposed to know which investments work for you? One way is to create a risk profile, or to find your "risk number" - a number that denotes how comfortable you are with risk and loss. Once you know this, it can be a little easier to know which direction you should move in while seeking out investments.
To find your risk number, download Dunham's Risk Profile Questionnaire. You final score will provide a proposed investment objective that should align with your personal comfort levels and investment objectives.Subscribe to the Dunham Blog