Recently, I heard the above phrase in a rap song by Pitbull. I was surprised to hear mention of investment risk/reward in a popular song. He did not go on to discuss European economic instability or currency valuation. That would have been truly shocking.
The statement provokes thought, though. People who are willing to take the most risk have the potential for greater reward – and greater loss. It is easy to have an asset allocation of 100 percent equities in an up market. Can you keep that allocation when the market is significantly down? Will you still sleep at night?
On the other hand, holding money in a money market fund earning near-zero interest is also a risky proposition. You must find some vehicle in which to invest because you cannot afford to earn nothing for your money. Inflation continues to rise, even when interest rates are not. The dollar you stash in a mattress will not be worth the same 10 years from now as it is today.
Finding the right allocation is very tricky. It requires a great deal of evaluation on your part. What is your current age? Do you have enough time to recover from a short-term loss? What are your investment goals for the next 5, 10, 15 years? When do you want to retire?
This is just a sample of some of the questions you should ask yourself. A thoughtful review of your situation with your investment advisor will help the two of you to determine the best asset allocation. Being brutally honest with yourself and communicating your goals, thoughts, and concerns with your investment advisor will allow you to work as a team. The two of you will be able to find the right allocation that can help you sleep a little better at night.
Cristy Freeman, AAMS
Senior Operations Associate