In part 2 of a three-part Q&A series about investing, Matt Murphy and Matt Reynolds discuss the concept of risk in investing and how new investors, young and old, should think about risk. Everyone is familiar with the concept of risk in everyday life (a popular slang term today is FAFO, for instance), and the idea is simiilar in investing. There are many investments you could make, some higher risk and others lower risk. Generally speaking, low risk investments offer very steady, but low, returns. High risk investments, on the other hand, can generate much higher returns, but also have a higher probability of loss.

When thinking about risk it's important to understand your time horizon. A young investor in her early 20's can afford to take more risk, because her time horizon is long. She will be investing for 30-40 years, and while the market will go up and down several times during that period, the law of averages applies: she will, on average, make a nice return during that time period if she consistently invests and stays invested. A young investor in this situation would most likely invest mostly (if not entirely) in a diversified portfolio of stocks, like an S&P500 index, which historically has returned about 10% annually on average. An older investor closer to retirement, however, cannot afford the risk of losing a large chunk of the value of their portfolio if the market takes a dive. They need to be certain that the value of their portfolio stays steady, so they can plan on withdrawing from that portfolio to fund their retirement years. This investor will likely be more heavily invested in bonds, treasuries, and other fixed income asssets, which generally have lower returns than stocks, but also fluctuate in value much less. Over their lifetime, a smart investor will regularly rebalance their portfolio to reflect their age, risk tolerance, and proximity to retirement.

Matt Murphy also explains the concept of target date funds. These funds are essentially investing on auto-pilot. You put money into a target date fund, and it rebalances your portfolio automatically over time, assuming that you will retire and begin withdrawing from your portfolio at a specified date in the future. Target date funds are useful because they don't require much upkeep or knowledge about investing. However they tend to be more expensive (higher fees) than passively managed index funds, and they rebalance your portfolio based on a fixed timeline which you may not align with as your life changes. If you want to retire earlier than your target date fund assumes you will retire, then your investments will be out of step with your needs. Nevertheless, they can be a great tool for the beginning investor.

As Matt emphasizes throughout this mini-series, the most important part of investing is consistency. Showing up every month and investing regularly over years and years, while sticking to your strategy, yields great returns. If you aren't consistent or constantly shift your strategy in reaction to the market, you will more than likely underperform the consistent, patient investor. Slow and steady wins the race!

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Advisory services offered through Commonwealth Financial Network®, a Registered Investment Adviser.

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results.

Investments in target-date funds are subject to the risks of their underlying holdings. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative investments based on its respective target date. The performance of an investment in a target-date fund is not guaranteed at any time, including on or after the target date. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.

Exchange-traded funds (ETFs) are subject to market volatility, including the risks of their underlying investments. They are not individually redeemable from the fund and are bought and sold at the current market price, which may be above or below their net asset value.

How to Get Started Investing Pt. 2: Risk, Target Date Funds, & Consistency