From
Your Perspective:
Early bird retirement investing
Your risk tolerance
One thing all investors need to consider is the
level of risk they’re willing to take. Some investments
—
short-term bond funds,
for example — are considered low
risk, which means it’s unlikely that you’ll lose any
of the principal you invest in them. Low-risk investments, however,
offer a lower potential return over the long term. The benefit
of choosing a riskier investment is that the potential earnings
are greater.
Most financial experts agree that the younger
you are, the more investment risk you can afford to take. The
theory is that if you have 30 or 40 years to let your money
grow, you’ll have time to recover from any setbacks.
If you’re participating in a 401(k),
your
investment choices will be limited by what your plan offers.
With an IRA you have free rein to choose nearly any investment you
like. Either way, you’ll need to decide how much risk you’re
willing to take, and allocate accordingly.
1. Find out what investment choices your 401(k) offers.
2. Research the past
performance of each fund and its investing focus.
Read the prospectus for a particular fund to determine the risks associated
with it.
3. Decide on an allocation that balances your total investment among a minimum
of three funds with different risk levels.
Be
realistic about how much risk you’re willing to take.
If you have a conservative perspective on investing, don’t
let yourself be talked into making 401(k) investments you’re
not comfortable with. But you should also consider the
costs of avoiding risk completely, and missing out on potential
high returns.
No matter what level of risk you decide
to take, resist the temptation to watch the movements of
your mutual funds every day. Since retirement is a long-term
goal, don’t bog yourself down in the small picture
of daily losses and gains.
