The stock market has been on a roller coaster ride in 2020. First it rose to dizzying new heights. Then it took a breathtaking plunge in March before starting to rebound again.
Most retirement plan investors have kept their bearings and made no changes to their investments this spring. It’s a great time to reassess your investments. It can suggest an asset mix given your circumstances and attitudes.
- In how many years do you plan to take out the money you’re investing?
- If you owned a stock or bond fund that dropped in value quickly, would you sell it―or buy more?
- Are you new to investing, or a seasoned pro?
As a best practice – many would suggest a mix of stock and bond funds targeted to your investment goal and your personality. Of course, you may decide to use a more conservative or a more aggressive mix than the one suggested—and that’s fine.
Stocks are generally riskier investments, but provide the greatest potential for long-term growth. Bonds are generally more stable, but don’t offer the potential for long-term gains as stocks do. You’ll want to find a balance of the two that you’d be comfortable owning over the long run, come what may.
As an investor, your risk tolerance can be hard to measure in the abstract. When the stock market offers gains year after year, you may not feel like you’re being too aggressive. But when the market dropped sharply, were you tempted to sell?
Having a better appreciation of real investment risks—and developing a long-term strategy based on them—may benefit you in good times, and help you weather the storm when market conditions are more challenging.
Whenever you invest, there’s a chance you could lose the money. Bond funds are made up of IOUs, primarily from companies or governments. These funds risk losing value if the debt isn’t repaid on time. Also, bond prices can drop when interest rates rise or the issuer’s reputation suffers.