Provided by RBC Wealth Management and George Coronado
When you hear the words “investment risk,” what first comes to mind? If you’re like most people, you think of the possibility of losing money in stocks. However, by paying too much attention to this type of risk, you may end up changing your investment strategy and ultimately impeding progress toward your long-term goals.
Of course, it’s easy to see why so many investors focus on the risks involved with stocks — especially in the midst of a long bear market — when you see the prices of your equities falling.
And yet, upon closer inspection, you may see the “actual risk” in a new light. It’s certainly true that a stock’s value can fall below the price you paid for it. On the other hand, you still own the stock — and until you sell it, your loss is only on paper. If you buy high-quality stocks, and hold them for the long term, you can often overcome the effects of short-term volatility — and your paper loss may evolve into a pocketbook gain.
Unfortunately, some investors don’t take this long-term perspective. Instead, daily or monthly price swings deter them from buying stocks, and they look for investments that offer less peril. But these “safe” investments carry their own types of risk, which, in their own way, can be every bit as dangerous as the chance of losing money in stocks.
Let’s look at a couple of these so-called “safe harbors.”
• Certificates of Deposit (CDs) — When you invest in a CD, you receive a guaranteed interest rate, and your principal is typically protected, as long as you hold the CD until maturity. Sounds pretty safe, right? However, CDs and other fixed income investments all share one common risk — inflation. Even a low inflation rate, such as we’ve enjoyed over the past several years, can erode the purchasing power of your CD. Over time, your CD’s real rate of return, adjusted for inflation, may be negligible.
• Bonds — Like CDs, bonds offer a fixed interest rate. And if you hold your bond to maturity, you’ll receive your full principal back as long as the issuer doesn’t default. But if you don’t plan on keeping your bond until maturity, you’ll face interest-rate risk — the prospect that market interest rates will rise, thereby reducing the value of your lower-rate bond. And even if you hold your bond until maturity, you’ll face reinvestment risk — the possibility that you won’t be able to reinvest the proceeds of your matured bond at the same interest rate you previously received.
As you can see, CDs and bonds are not truly “risk-free” vehicles. But that doesn’t mean you shouldn’t consider investing in them. The fact is that no investment is without risk. But by knowing the risks involved, and by constructing a diversified portfolio of high-quality investments that meet your individual needs, you can help minimize your overall risk level and make progress toward your financial goals.
This article is provided by George Coronado, a financial consultant at RBC Wealth Managementin Plantation, Florida, and was prepared by or in cooperation with RBC Wealth Management. The information included in this article is not intended to be used as the primary basis for making investment decisions nor should it be construed as a recommendation to buy or sell any specific security. RBC Wealth Managementdoes not endorse this organization or publication. Consult your investment professional for additional information and guidance.
George Coronado can be contacted at: email@example.com
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