It is the classic financial puzzle: how to balance risks and returns. In a time of occasionally wrenching volatility and low interest rates, ace financial advisor Jeff Rose, the founder of Alliance Wealth Management in Carbondale, Ill., and also the founder of the website Good Financial Cents, has some good ideas:
Risk lies at the core of all investments. This notion reminds me of the first time I stood at the top of the high dive at the rec center pool. I was a nervous wreck. I never realized how afraid of heights I was until that moment. Many who never invested before have this same apprehensive feeling.
With the rising cost of living, it’s imperative that we invest, preferably with the lowest risk possible, to generate the highest yielding returns we can.
High rates of return on your investments are wonderful because you don’t have to invest as much capital to reach your investing goals. Yet the higher return you want, the more risk you take to get it.
As you near retirement, or your high school senior is about to enter college, your appetite for risk drops precipitously. You simply cannot afford to see a huge drop in the market right before the time you need to begin withdrawing funds from the investment accounts for retirement or college bills.
Instead, you need to shift to low-risk investments. These types of investments generate a lower return because you aren’t taking as much risk, but you’re OK with that. As the time to draw down the investments arrives, capital preservation is more important that astronomical growth rates. You need to know your account won’t drop 25% in a year and thwart your investing plans.
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