When planning your financial future, don't only aim for average investment returns.
As well as considering the possibility of high investment returns, also think about your levels of risk tolerance.
Be wary of “average” returns. While average grades may let you graduate from school, the “average” performance of an investment might not let you achieve your fiscal goals. Average is a combination of both top and bottom scores. Consider the ramifications of averaging a stock’s performance over a five-year period. Chances are that if you needed to cash in on your investment suddenly in the fourth year, you might find yourself a lot poorer than the “average” investor who held onto the investment for the full five years.
Risk and reward
Many investors forget what risk means. They cite the phrase, “the greater the risk, the greater the reward.” But by believing that risk means reward, in effect they’re ignoring the fact that a “risky investment” also entails the real risk of loss. Any position in the market contains a certain measure of risk. Some are riskier than others and, as the idiom asserts, sometimes it’s better to be safe than sorry.
Set reasonable expectations
If you have reasonable expectations, you are less likely to be disappointed by a lackluster market performance. Obviously, there are only two directions that the market can move: up or down. Investors may be divided on which direction they think the market will go, but they should not be ambivalent as to what their long-term goals are. A carefully constructed portfolio can help protect an investor against movement in either direction. However, even the most detailed planning can prove useless if an investor has unrealistic expectations. Therefore, do your research wisely and don’t bet your financial future on a stock’s history. Remember: past performance does not guarantee a future profit.
When all is said and done, risk is risky. Even if a stock has a stellar track record, past performance is no definite guarantee for future profits. At the same time you might be rewarded for taking chances, or your principal might get lost. Research wisely, but don’t bet your future goals on a stock’s history. Sometimes money in cash vehicles, even with low-interest rates, is an above-average investment choice.
For more information on how to take your levels of risk into account, read Risk Tolerance and the Art of Asset Allocation.
Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.