Balancing Risk and Reward

As we have seen in previous slides, each investment brings an expected rate of return and an expected level of risk.  Stocks typically provide a higher rate of return in exchange for a higher degree of risk, whereas bonds generally provide a lower rate of return in exchange for a lower degree of risk.

However, by combining stocks and bonds together in varying proportions you may alter the balance of risk and reward in your portfolio.  As you can see, adding a small percentage of bonds to 100% stock portfolio may help reduce your risk without significantly impacting your return. Conversely, adding a small percentage of stocks to a 100% bond portfolio may enhance your return and lower your overall risk.  The same holds true when you add other investment classes, such as foreign stocks or money market securities.

How does this work?

Stock, bonds and other investment types typically rise and fall at different times during a market cycle.  Therefore, a decline in one investment type may be offset by gains in another, which may produce a more appealing risk/reward trade-off.

By analyzing your time horizon, risk tolerance and required return, a professional financial consultant can help you find the best risk/reward trade-off to help you meet your financial goals.

This chart is for illustrative purposes only and does not represent the performance of any specific fund.

* Stocks are represented by the Standard & Poor’s 500 Index, an unmanaged index generally representative of the U.S. Stock Market.

** Bonds are represented by the U.S. Long-Term Government Bond Index, an unmanaged index generally representative of the long-term U.S. bond market.

Government bonds are guaranteed by the U.S. Government and offer a fixed rate of return and principal value if held to maturity.  Investors cannot invest directly in any index, although they can invest in the underlying securities.

Risk: can be characterized as uncertainty or volatility in a portfolio.  The higher the volatility (risk) the greater the chance that an investor may lose some or all of their investment.  There are different types of risk associated with stocks and bonds, and stocks are typically more volatile, thus carrying a higher degree of risk.

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