Understanding Investing and Risk by Lindsay Hollinger

Investing can feel overwhelming, especially when faced with decisions about risk. But understanding and managing risk is the foundation of building a strong investment portfolio that aligns with your financial goals and personal comfort level. Here’s how to approach it.

Objective vs. Subjective Risk

Risk isn’t one-size-fits-all. Objective risk refers to measurable factors, like market volatility or historical returns. For example, stocks are typically riskier than bonds but may offer higher returns over time. On the other hand, subjective risk is about how you feel about those fluctuations. If market dips cause you stress, your tolerance for risk may be lower, and that’s okay.

The Role of Asset Mix

Your portfolio’s asset mix—how you divide your investments among stocks, bonds, and cash—plays a crucial role in managing risk. A more aggressive mix (heavier in stocks) might suit a long-term goal, like retirement in 30 years. A more conservative mix (focused on bonds and cash) could be better for short-term goals, like buying a home in five years.

Time Horizon Matters

Your time horizon—how long you plan to invest before needing the money—is key to understanding your risk capacity. Longer time horizons allow for more risk-taking since you have time to recover from market downturns. Shorter horizons call for more stability to ensure your money is there when you need it.

Aligning Risk with Financial Objectives

Think about your specific financial objectives:

• Are you investing for retirement, children’s education, or a vacation?
• How much do you need to reach your goal, and by when?

Clear goals help define how much risk you should take. For example:

• A 20-year retirement fund might be heavy on stocks.
• A 5-year savings goal for a wedding might lean toward safer bonds and cash.

Revisit and Rebalance

Life happens—your goals, income, and comfort with risk can change. Revisit your portfolio annually or after major life events to ensure it still reflects your objectives. Rebalancing helps maintain your target asset mix as markets fluctuate.

By understanding the balance between risk and reward and aligning it with your goals, you can feel confident about your investment choices. Starting this journey may seem complex, but over time, you’ll grow more comfortable—and your portfolio will thank you.