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When you're thinking about investing, the word “risk” can carry some negative connotations. You do not want to put your hard-earned money at the risk of loss if you choose a poor investment, but putting your assets into cash or another “safe” asset carries its own set of risks.
How can you make the right choice for your situation? Learn more about the different risk profiles associated with the four primary types of investments: stocks, bonds, precious metals and cash alternatives.
There are thousands of ways to invest your money, from putting it all into a blue-chip company like Apple to buying gold and buying municipal bonds, but all investments generally fall into one of four categories. Each of these investment types has unique risks and benefits.
Stocks can earn results in the long run, but they are often riskier and more volatile than other investments in the short term. In other words, you should not put money that you plan to use in the next few months—or even years—into stocks, as this can risk having to withdraw the funds during a market drop.
Over the long term, stocks have outperformed just about every other investment out there, including bonds. Although past performance is no guarantee of future returns, placing long-term investments into stocks might yield the highest rate of return in the future.
Bonds tend to be more stable during times when stocks are especially volatile, which can make them a good hedge in one's portfolio. Because bond funds are more conservative than stock funds, they are a favorite for those in and nearing retirement, as there's less risk of a sudden drop or rise in value. This stability comes at the cost of a lower average rate of return for bonds versus stocks.1
Another common investment is precious metals—most commonly gold and silver. These precious metals have an intrinsic value lacking in investments like stocks and bonds, and many investors use them in an effort to manage inflation or economic instability. However, they can be more difficult to liquidate, and their value can fluctuate wildly. Someone who purchased gold in February 1980 (at its all-time high of $2,248 per ounce) still has not recouped their initial investment, while those who invested a few years earlier (or later) may have profited.2
Cash and Cash Alternatives
Some say cash is a low-risk investment, but it carries the inherent risk of inflation. If you put $10,000 under a mattress and assume a modest 2.5% inflation rate, the buying power of this $10,000 in 30 years will be cut in half.
Your Asset Allocation Should Reflect Your Appetite for Risk
There is no one-size-fits-all approach to investing. Ideally, your portfolio will be as diverse as it needs to be to reflect your risk appetite. If you're an aggressive investor with a long-term horizon, you may dive 100% into stocks; a retiree with a need for fixed income may approach bonds and cash instead. Working with a financial advisor can give you the insight you need to choose investments that work for you.
Talk to a Financial Advisor
Financial advisors with BECU Investment Services are here to help. They get to know you and understand your goals so they can implement a financial and investment strategy that's best for you. Set up a complimentary consultation or call 206-439-5720.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
1 Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
2 The fast price swings in precious metals will result in significant volatility in an investor's holdings. These investments include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.