recently joined an investment club to hone her stock-picking skills.
Walter figures most of his extra money should be earmarked to grow his business. Any cash he puts to work in the market, he reasons, should be invested conservatively. “Our investment strategy has been centered on retirement savings that we’ve invested in mutual funds,” he says. “Beyond that, my riskiest investment is going to be in my company’s development.”
You, too, will find your profile as investor unique. It’s shaped by many factors. How comfortable are you with taking chances? Are you willing to bet on bigger gains even if that might mean taking heavy losses? How secure do you feel about your job, your lifestyle, the stock market, the economy?
No matter how you look at it, as you start to shape your investment style, you’ll have to come to grips with your tolerance for risk. We’ve all heard about the 17-year bull market that began its charge in 1980. And with the market up 20% year-to-date as of July, it’s difficult to imagine that stocks go down as well as up. The last jarring reminder came 10 years ago with the crash of October 19,1987, a day when stocks lost 23%. While the market is the best vehicle to grow funds over time, its prone to occasional volatility, periods 41 when changes of fortune can mean great gains or staggering losses. A crisis–say a war in the Middle East or a devastating earthquake–can send shock waves through the market and knock the wind out of stocks.
It’s that kind of volatility that underlies the risk of investing. One rule of thumb, though, is that the higher the risk of an investment, the greater its potential return or gain. And while there’s no way to predict the future, a look at past results over time will often give you a very good idea of what to expect ahead. Small company shares, a particularly volatile sector of the stock market, rose 142.9% in 1933 (their best year according to Ibbotson Associates, a Chicago research firm), b
ut plummeted 58% in 1937. In the period from 1926-95, they averaged a 12.5% yearly return. By comparison, large company stocks rose 54% in 1933 (their best year), lost 43% in 1931 (their worst) and averaged 10.5% during the same 70-year time frame.
It’s important that you’re comfortable with the risk you’re willing to take. The second worksheet in our series will help you assess just that– how much up and down you’re willing to endure as a trade-off on final return. In it, you’ll find questions that will help you determine just what kind of investor you are–aggressive, conservative or somewhere in- between. This will help you to shape a portfolio that mirrors your personality.
Whether you’re willing to dive headlong into chancy small company stock funds or prefer the staid, steady advances of blue chips, there are ways to keep risk to a minimum. One, as you no doubt already know, is investing in mutual funds. Handing