Set Return Expectations200191457-001

Every important decision in life involves some risk. Whether you're buying a home or changing careers, you need to weigh whether the potential rewards offset the risk.

Making decisions about investing is no different. You need to factor in market risk as you determine the return you expect to receive. Market risk is the potential that your investments could lose value.

  • Understand Market Cycles
  • Consider Inflation
  • Determine Your Risk Tolerance
  • Diversify Assets and Study Historical Performance

Understand Market Cycles
You need to decide how much of the market's ups and downs you can handle.
The important thing is not to become discouraged during market lows or overly optimistic during market highs. A long-term outlook is the best approach to managing the stock market's ups and downs. Otherwise, you might be tempted to buy or sell investments and could risk doing that at the wrong time. The result? You could miss some of the market's best days.

Consider Inflation
Another long-term risk to your goals may be that the return on your investments won't keep pace with inflation.
To outpace inflation, you'll probably need to be willing to take on some investment risk to achieve returns that help you reach your goals.

Determine Your Risk Tolerance
What's your comfort level with risk? One way to determine that is to consider how you might react to a sudden drop in the market. Ask yourself what you would do if the property market declined and the value of your investments suddenly fell by 20%.
Would you sell everything or move to a money market fund?
Would you sell some of your investments to avoid losing even more if the market kept falling?
Would you be willing to wait and see if the market rebounds over time?
Or would you use the market drop as an opportunity to buy more of the securities you like because prices would be lower?
Understanding your risk tolerance toward investing can help you decide how your portfolio should be allocated.

Diversify Assets and Study Historical Performance
Once you know your risk tolerance, you can begin to build a portfolio to match your risk comfort level. The idea is to select investments that react differently to market conditions so that a gain in one market could offset a decline in another, minimizing risk to your overall portfolio. Keep in mind, diversification alone cannot ensure against loss.

Reviewing historical returns for these investments may help you set realistic expectations for the future, although past performance is not a guarantee of future results. Historical averages represent returns over time, and year-to-year returns may vary.

When choosing investments, take into account your investment goals and when you'll need money to fulfill them. Take time to understand the objectives of each investment type to help determine whether your choices fit your overall goals. These factors, along with risk tolerance, play an important role when you build a diversified portfolio.

Build a Diversified Portfolio
By diversifying your investments you can lower your overall investment risk. Diversification can help even out price swings during the normal ups and downs of the market, although it cannot ensure against loss.