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Understanding Risk

There’s no such thing as a free lunch. This famous expression on Wall Street is useful in understanding that investors must take risks to be rewarded with returns.

There are many types of investment risk, from largely external risks such as economic or geopolitical forces, to inherent risk factors with academic names like beta, small cap, value, etc.

The important thing to understand is that risk and return are related – higher risk means higher expected returns, lower risk means lower expected returns.

We believe the amount of risk you take should depend on your risk tolerance and the return needed to reach your investment goals. That’s why we create asset allocations with the lowest risk in relation to the returns needed to accomplish those goals. Lower risk contributes to lower volatility, which can give you steadier returns and help you stay disciplined.

Choosing a risk level in your portfolio to generate the long-term returns you need rather than just the highest potential returns can make daily market changes during your investment journey less emotional. That way, you can stay within your risk tolerance and stay confident with your investment plan,
no matter what’s happening outside your portfolio.