By Gary Meeks, RICP®
My goal in writing this article is to get you thinking about what risk is and provide some tools to help you access your risk tolerance and make better investment decisions.
Risk takes on many forms but is broadly categorized as the chance an outcome or investment’s actual return will differ from the expected outcome or return. Risk includes the possibility of losing some or all of the original investment. Different versions of risk are usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. Source: https://investopedia.com/terms/r/risk/asp
I’m going to give you some important factors to consider when determining the level of risk that is appropriate for you.
Investment Objective:
Growth: Saving for retirement in 30 years? You may be able to bear some risk in hopes of higher returns to meet your objective of having enough saved to get you through your retirement years. Growth investments such as stocks may be appropriate to help you meet your investment objective with potentially higher returns and more volatility.
Growth & Income: Just retired and need income? Now is not the time to take high levels of risk. Often, a balance between fixed income (bonds, CDs, fixed annuities) and stocks may help investors meet their objective of income with some growth.
Principle Protection: You have adequate income and you’re over age 80. Money market instruments such as CDs, savings and short-term treasury securities may be most appropriate to keep your money safe and liquid if you need it for emergencies. At this point, investing in risk assets is probably not appropriate for you.
The above are just three examples and is not comprehensive of all possible investment objectives or investment alternatives.
Time Horizon:
Short-term investors should avoid risk, and medium-to-long term investors may need to take some risk to achieve the growth they need to accomplish their financial goals. The higher the risk, the higher the potential return.
Since 1928, the S&P 500 stock index has had negative returns 30 times over the last 90 years. What is the most consecutive negative years? Answer: Four, 1929-1932. Two times during the last 90 years, the index was down three years in a row. The most recent was 2000-2002. https://www.macrotrends.net/2526/sp-500-historical-annual-returns is the source for this data.
Volatility:
Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the investment. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Source: https://www.investopedia.com/terms/v/volatility.asp.
If the degree of volatility in your investment keeps you awake at night, you should probably consider a less risky investment. The volatility of stocks is generally greater than the volatility of bonds or other fixed income investments.
Rating:
Rating agencies such as Moodys, Standard & Poor’s, and Fitch rate issuers of bonds and insurance companies as to their ability to meet their financial obligations. These ratings can help you asses the risk of certain fixed income investments.
The following shows Standard & Poor’s ratings and ability to meet financial obligations.
AAA Extremely Strong
AA Very Strong
A Strong
BBB Adequate
All the above ratings are considered “Investment Grade.” which means the issuer has a relatively low risk of default. The following are considered “Speculative Grade” or low quality and risk of default is greater.
BB Less vulnerable in the near-term but faces major ongoing uncertainties.
B More vulnerable but currently has the capacity to meet financial commitments.
CCC Currently vulnerable.
CC Highly vulnerable; default has not yet occurred but is expected to be a virtual certainty.
C Currently highly vulnerable to non-payment.
D In default
Source for the above: www.spratings.com
Investment sales literature often includes ratings information, so look for it when your making an investment decision.
Before investing, know your investment objective and risk tolerance. If you need help, seek advice from a competent financial advisor.
Gary D. Meeks, RICP®, is a registered representative offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker dealer and Registered Investment Adviser. Cetera is under separate ownership from any other named entity. 90 W 100 N STE 6, Price, UT 84501 (435) 637-8160.
The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. Investors can not invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. “The Standard & Poor’s 500 is an unmanaged group of securities considered to be representative of the stock market in general. Past performance does not guarantee future results.”