Financial Focus
When investing, learn all aspects of risk
In life, you can’t avoid all risks — and
you shouldn’t try, because endeavors that carry risk also bring the prospect of reward. And it’s certainly the same in the investment world. So instead of trying to invest risk-free, which is im- possible, learn to recognize the different types of investment risk while becoming familiar with your own risk tolerance. To start with, let’s quickly look at
some of the most common forms of in- vestment risk: • Risk of losing principal — Tis is the
type of risk most commonly associated with investing. You could lose some, or even all, of your principal if you sell an investment, such as a stock, whose value has dropped lower than the purchase price. You can’t eliminate the risk of losing principal, but you may be able to reduce it by buying quality stocks and holding them long enough to overcome short-term market drops. • Inflation risk — With an investment
that pays a fixed rate of return, such as a certificate of deposit (CD), you run the risk of not keeping up with inflation,
which means you could lose purchas- ing power over time. Consequently, it’s a good idea not to “overload” on these types of investments. • Interest-rate risk — When you own
a bond, your investment is somewhat at the mercy of changing market interest rates. For example, if you buy a bond that pays four percent interest, and market rates rise so that newly issued bonds pay five percent, the relative value of your bond will go down; no one will pay you face value of your bond when they can get new ones that pay higher rates. Of course, if you hold your bonds until maturity, which is often a good idea, you can avoid being victimized by interest-rate risk. • Concentration risk — Tis type of
risk occurs when you have too much of your money concentrated in one area, such as in a particular stock or in one industry. If a downturn strikes that stock or industry, your portfolio could take a big hit. To combat this type of risk, you need to diversify your hold- ings among stocks, bonds, government securities and other investments. While diversification, by itself, cannot guar- antee a profit or protect against a loss,
it can help reduce the effect of volatil- ity.
In addition to understanding
the above types of risk, you also need to be familiar with your own risk toler- ance and how it affects your investment strategy. If you are constantly worried about “the market,” you’ve probably got too many investments that are at risk of losing principal. At the other end of the spectrum, if you’re always concerned that your portfolio won’t grow enough to generate the income you’ll eventually need for retirement, you may be invest- ing too conservatively — and, as a re- sult, you’re inviting inflation risk. Ultimately, you need to match your
own risk tolerance with a strategy that allows you to achieve your goals. Tis will require self-awareness, patience, discipline — and, at times, a willingness to move outside your own “comfort zone.” By learning to balance and man- age risk, you can ultimately put yourself in a position to pursue your investment strategy.
Tis article was written by Edward
Jones for use by Bill Boughton, Weav- erville’s local Edward Jones Financial Advisor.
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With an Edward Jones Roth IRA, any earnings are tax-free, and distributions can be taken free of penalties or taxes.* You may even benefit from converting a traditional IRA to a Roth IRA.
* Distributions of earnings from a Roth IRA could be subject to taxes and a 10% penalty if the account is less than five years old and the owner is under age 59 1/2.
At Edward Jones, we spend time getting to know your goals so we can help you reach them. To learn more about why an Edward Jones Roth IRA can make sense for you, call or visit your local financial advisor today.
Bill Boughton, AAMS® Financial Advisor
.
61 Weaver Boulevard Weaverville, NC 28787 828-645-0341
www.edwardjones.com Member SIPC
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