INVESTING 101 – RISK VS REWARD: WHAT DOES IT REALLY MEAN?
Risk is defined on Investopedia.com as the chance that an outcome or investment’s actual gains will differ from an expected outcome or return. This highlights the inherent risk of investing and the type of return an individual can hope to expect. Individual companies and stocks will have their own risk attached. This risk will be in the type of industry they are in, how well the management team can navigate different economic scenarios, as well as outside risks such as geopolitical issues. A portfolio should be built with risk metrics that match the individual or family. Depending on the financial goals and willingness and ability to take risk the portfolio should match. Willingness to take risk is very individualized and comes down to your personal ideology on how much you can handle the roller coaster of the portfolio. Your ability to take risk will be more based on your financial goals – if you are looking to save for a down payment in the coming 3 years the portfolio should be at a lower risk profile. You do not want to find your dream house with the markets off 20% and pull your money. On the other side of that equation, investing for retirement can be at a higher risk with decades to benefit from the ups and downs of the markets.
Traditional finance highlights that the higher risk taken within a portfolio the higher the long-term returns should be. Building a diversified portfolio to mitigate risk where possible should be a high priority for most investors.
If you would like to discuss further, please feel free to connect with one of our portfolio managers.
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