Investment Risk: Don t Avoid It Manage It!

Transcription

1 Investment Risk: Don t Avoid It Manage It!

2 Today s Agenda What is risk? Types of investment risk Investments that carry each type of risk Match personal goals with investments and risk levels Risk management strategies Where to go for help

3 What Is Risk? Part of everyday life Something we can manage

4 Types of Risk Investment risk Market risk Interest rate risk Credit risk Inflation risk

5 Investment Risk The possibility that an investment s value will fluctuate

6 Market Risk The chance that your investment s value will move in line with the broader market

7 Interest Rate Risk The likelihood that an investment s price will react to changes in interest rates

8 Credit Risk The possibility that a bond issuer will be unable to repay principal and interest

9 Inflation Risk The chance that an investment will lose its purchasing power over time due to rising prices

10 Investments That Carry Each Risk Risk The Long-Term Picture Investment Risk Market Risk Interest Rate Risk Credit Risk Inflation Risk Stocks High High Moderate Low Low Overall Long-Term Risk/Return Potential: High Stock investing involves risk, including loss of principal.

11 Investments That Carry Each Risk Risk The Long-Term Picture Investment Risk Market Risk Interest Rate Risk Credit Risk Inflation Risk High-Yield Bonds High Moderate High High Overall Long-Term Risk/Return Potential: High Moderate Corporate Bonds Moderate Moderate High Moderate-High Overall Long-Term Risk/Return Potential: Moderate Moderate U.S. Gov t. Bonds Low High High Low Overall Long-Term Risk/Return Potential: Low High High-yield bonds are not investment-grade securities, involve substantial risk, and generally should be part of the diversified portfolio of sophisticated investors. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, offer a fixed rate of return and fixed principal value.

12 Investments That Carry Each Risk Risk The Long-Term Picture Investment Risk Market Risk Interest Rate Risk Credit Risk Inflation Risk Money Market Investments Low Low Low Low High Overall Long-Term Risk/Return Potential: Low

13 Match Personal Goals Your risk tolerance will depend on: Goals Time horizon

14 Major Investment Goals Retirement, college education: growth Home purchase: modest growth, principal protection Emergency fund: safety

15 General Time Horizons Long-term goals 10 or more years Goal: Growth, growth & income Mid-term goals 5 to 10 years Goal: Growth & income, income Short-term goals 5 years or less Goal: Preservation of principal, income

16 Working Out Your Goals Know your most important goals Decide on realistic time lines Remember shortest term doesn t mean most important

17 Understand Your Risk Tolerance Let goals and your time horizon drive your risk tolerance. Learn to manage the level of risk that is right for you.

18 Risk Management Two tools of risk management Asset allocation Diversification

19 Diversification The technique of splitting assets among different securities to help manage risk Diversification may help you spread the risk in your portfolio, so that investments that do poorly may potentially be balanced by others that do better. Diversification does not ensure a profit or guarantee against loss Diversification can be achieved by owning broad-based mutual funds or by combining a group of funds that each have a narrower focus There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk. Investing in mutual funds involves risk, including possible loss of principal. Investments in specialized industry sectors have additional risks, which are outlined in the prospectus.

20 Asset Allocation How you divide your money among different types of assets such as bonds, stocks, and money market investments Technique for pursuing an investment goal with a given level of risk. Asset allocation does not ensure a profit or protect against a loss.

21 Diversification + Asset Allocation = Powerful Potential Risk/reward results over 30 years ended December 31, (Stocks represented by the S&P 500, bonds by Barclays U.S. Aggregate Bond Index, money markets by Barclays 3-Month Treasury Bill Index.) Aggressive Portfolio bonds money market instruments 10% 10% 80% stocks Moderate Portfolio money market instruments 30% bonds 10% 60% stocks Conservative Portfolio 30% stocks money market instruments 20% 50% bonds Annualized return: 9.53% Standard deviation: 12.24% Annualized return: 8.90% Standard deviation: 9.37% Annualized return: 7.46% Standard deviation: 5.23% Sources: DST Systems, Inc.; the Federal Reserve. Past performance cannot guarantee future results. Indexes are unmanaged. Investors cannot invest directly in any index.

22 When Should Your Investments Change? Review your allocation at least once a year More often if: You experience major life changes (new job, marriage, new child) The stock or bond market goes up or down significantly during a given year Your investment time frame changes

23 Risk Management Dollar Cost Averaging Still sweating? Relax There s dollar cost averaging (DCA)! Invest defined amounts on a regular basis Helps develop long-term investing habit Dollar cost averaging involves continuous investments in securities regardless of price fluctuations. An investor should consider their ability to continue purchasing through periods of low price levels. Dollar cost averaging does not ensure a profit or protect against a loss in declining markets.

24 How DCA Works Investment per month: $50 Average price per share: $13.17 (total of prices/number of months) Average cost per share: $13.10 (total amount invested/ number of shares purchased) Month: Shares Purchased Investment price: $ $ $ $ $ $12 Total shares: 22.9 Average price per share: $13.17 Average cost per share: $13.10 Periodic investment plans cannot assure a profit or protect against losses. Investors should consider their ability to make continuous investments through periods of fluctuating prices.

25 What DCA Can Do for You Affordability Convenience Comfort

26 Risk Management Emergency Savings Check your insurance needs Have three to six months living expenses available in case of unemployment or emergencies (such as unexpected home and auto repairs) Consider very conservative vehicles, such as savings or money market accounts

27 Where to Go for Help Financial professionals Financial Planning Association (

28 Resources at Your Fingertips Professional and business groups Investment clubs National Association of Investors Corporation , Software, Internet, library

29 Drive Your Portfolio s Risk Don t Let It Drive You Crazy