Investing Strategies: Balancing Risk and Return

The key to building the right retirement portfolio is to balance risk and rewards.

Planning for retirement is vital for helping to secure your financial future, and investing plays a critical role in building your nest egg. But did you know that it’s equally important to balance the risks and returns of your investments for financial success?

Undertaking the balancing act of managing risk and reward in investing means knowing the basics, understanding the role of risk in a healthy portfolio, and better incorporating risk into your portfolio in a way that makes the prospective reward worth the cost.

Below, we will explore some effective investment strategies that can help retirees to balance the risk and return of their investments. So, whether you are a new retiree or planning for your retirement, here’s what you need to know.

What Does Risk and Reward Mean for Investing?

The risk-reward ratio is a mathematical calculation used by investors to measure the expected gains of a given investment against the risk of loss. 

A lower risk/return ratio is often preferable as it signals less risk for an equivalent potential gain. However, in general, the greater the risk, the greater the expected return demanded.

To calculate risk/reward ratio, use this formula:

Potential loss / potential profit = risk/reward ratio

Divide the amount you could profit (that’s the reward) by the amount you stand to lose (that’s the risk). So if you bought a stock for $100 and planned to sell it when it hits $200, the net profit would be $100.

Please note: Some investors use reward/risk ratio, which reverses the above formula. However, for reward/risk ratios, higher numbers are better for investors.

Balancing Your Investment Strategy

A balanced investment strategy combines asset classes in a portfolio in an attempt to help balance risk and return. Typically, balanced portfolios are divided between stocks and bonds, either equally or with a slight tilt, such as 60% in stocks and 40% in bonds. Balanced portfolios may also maintain a small cash or money market component for liquidity purposes.

There are many different ways to put together a portfolio, depending on the preferences and risk tolerance of the investor.

Diversify Your Portfolio

Diversification is one of the most effective ways to help balance risk and return in your investment portfolio. By investing in a variety of assets, you can help reduce the risk of investments affecting your overall portfolio. Some examples of assets you can invest in are:

  • Stocks
  • Bonds
  • Real estate

Diversification allows retirees to spread their investments across different sectors, which helps to mitigate risk. With a diversified portfolio, you can help minimize the impact of market fluctuations on their investments and potentially achieve a more stable return over time.

Invest in Bonds

Bonds are sometimes a safer investment option than stocks as they offer a fixed rate of return and are potentially less volatile. Retirees can invest in government bonds or corporate bonds, depending on their risk appetite. Government bonds are considered to be the safest investment option as they are backed by the government.

However, corporate bonds offer higher returns but come with higher risk. Bonds can provide a more stable income stream, which makes them an ideal investment option for those who need a reliable source of income during retirement. By investing in bonds, retirees can create a more balanced portfolio that helps generate a predictable and steady stream of income.

Consider Investing in Mutual Funds and ETFs

Mutual funds and ETFs (exchange-traded funds) are cost-effective ways to diversify investment portfolios. These investment vehicles pool money from multiple investors to invest in a variety of assets, such as stocks, bonds, and commodities. By investing in mutual funds or ETFs, retirees can gain access to a diversified portfolio that helps balance risk and return.

Mutual funds and ETFs also offer the benefit of professional management. This makes them an ideal investment option for retirees who may not have the time or experience to manage their investments actively. Additionally, mutual funds and ETFs offer lower investment minimums and fees than individual stocks or bonds, making them a more accessible investment option for retirees.

In short, mutual funds can be an effective strategy for retirees looking to build a diversified portfolio. However, it’s always best to consult with a financial professional to see if mutual funds are the right investment for you.

Consult with a Fiduciary Advisor

Collaborating with a financial advisory firm, such as Johnson Wealth and Income Management, presents an excellent opportunity to develop an investment plan that aligns with your financial goals. A professional financial advisor can assist you in investment strategies and help retirees to manage the risk and return of their investment portfolio.

A good financial advisor can provide the following benefits:

  • Help you comprehend and leverage employer matching contributions.
  • Help enhance your investment diversification.
  • Advise on the most suitable type of retirement accounts (Roth, Traditional IRA).
  • Help you to capitalize on Iowa state tax breaks.
  • Conduct periodic reviews of your portfolio and recommend adjustments when necessary.
  • Identify potential portfolio risks and recommend strategies to help mitigate them.

Working with a Fiduciary advisor like Matthew P. Johnson of Johnson Wealth and Income Management gives you access to high quality investment advice and guidance. Giving you the tools to make well-informed decisions about your investments.

Final Thoughts

Balancing risk and return is essential in order to achieve your financial goals during retirement. By following these tips and consulting with a financial advisor, you can help balance risk and return on your future investments.

At Johnson Wealth and Income Management, we work hard to help ensure that our clients investment portfolios align with their financial goals and objectives. If you’re ready to begin your journey towards investing for retirement, don’t hesitate to reach out. Contact us here today to schedule your complimentary consultation.

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