Balance risk and reward in your investment portfolio is of utmost importance, including understanding your risk tolerance, diversifying wisely, investing for the long term and regularly rebalancing it.
Typically, taking more risk can increase your potential returns; however, having a balanced portfolio may help ensure a peaceful night's rest and achieve your financial goals.
Diversification
Diversification refers to spreading your risk across a range of investments in order to achieve higher risk-reward ratios and reduce the chances of any single one performing badly and jeopardizing your financial security.
Diversifying allows you to strike a balance between growth and volatility by investing in both large-cap stocks and smaller stocks as well as various bonds or commodities, or by selecting investments from disparate sectors, industries or geographic regions.
Diversification can only go so far. It doesn't provide full protection from loss, nor guarantee a positive return, which makes it important to regularly review your portfolio to make sure it has an appropriate amount of exposure - for instance if it skews more heavily towards stocks than bonds, you might need to rebalance in order to decrease its level of exposure.
Long-term investments
Establishing the appropriate balance between risk and reward is vital to reaching your financial goals. Doing this requires extensive research, diversification and an awareness of your own personal risk tolerance; by doing this, you can maximize investment returns while decreasing losses.
One of the key factors in establishing your risk-reward ratio is how long you plan to hold an investment. Typically, longer time horizons enable investors to take greater risks as there will be plenty of opportunity for short-term market fluctuations to recover over time.
Long-term investment strategies can also help you avoid the temptation to chase returns, which often come with heavy risks. For instance, investing in moonshot stocks that fail could force you to sell at a loss and miss out on future growth opportunities. A financial professional from Navy Federal Investment Services can assist in developing an asset allocation strategy tailored specifically for you that balances risk with rewards.
Taxes
Taxes and inflation can have a devastating effect on the rate of return from long-term investments, so your wealth manager can assist in designing an approach to manage them in order to preserve the value of your portfolio over time. Strategies such as using registered plans (RRSPs and TFSAs) for tax deferment purposes or donating appreciated assets as gifts may reduce overall tax liabilities; although tax considerations shouldn't drive investment decisions but instead should form part of an integrated wealth management approach.
Managing risk
Risk management is an integral component of investing, and understanding and employing tools such as the risk-reward ratio can help. Risk refers to any possible losses from trades or investments while reward is the amount you could potentially earn through positive returns.
Every investment carries some level of risk, but it's essential to remember that the risk-reward ratio will depend on your trading style and financial goals. Investors with more aggressive trading styles or greater tolerance levels may be willing to take on more risk in search of greater rewards.
While diversifying investments is essential, limiting exposure to certain risk factors is equally essential. A gold exploration company presents different risks than an emerging technology stock; and investing with low correlations between market movements and returns can help achieve improved risk/reward ratios.
