Wherever you are
Wherever you are going
Free yourself from the
investment rollercoaster
Put yourself on firmer ground
Remember your first ride on a rollercoaster? The slow
climb to the top … the hairpin turns along the way …
the rushing highs and lows to the finish? The stock market
can be a lot like a rollercoaster, leaving investors feeling
queasy about their investments. So, how can you come
to grips with the market’s ups and downs while putting
yourself on firmer ground? The key is understanding
who you are as an investor.
Know yourself
The fluctuations of the market can be hard to stomach.
That’s why it’s important to understand how you feel
about risk and invest accordingly. For example, if you lie
awake at night worrying about your investments, then it’s
likely your portfolio is more aggressively invested than may
be appropriate for you. But keep in mind: Playing it safe
with your portfolio can bring you a degree of peace
of mind, but it can also provide a false sense of security.
Guaranteed-return and other conservative investments
often pay a fixed rate of return. However, if that return
doesn’t keep pace with the rate of inflation, your dollars
will be worth less than when you started.
Assess the risks
When talking about risk, most people focus on the
potential loss of their invested dollars. Yet market risk is
just one of several types of risk you’ll want to consider
as you evaluate your existing portfolio or make any
investment decisions. For example, many investments that
are low in market risk, because they offer a stable return,
are subject to interest rate risk. Interest rate risk is the
chance that you will be “locked” into a certain fixed rate of
return as interest rates move higher. Others may be subject
to purchasing power risk, which is the possibility that the
total return from your investment may not keep pace with
the rate of inflation.
The fact is, the type and amount of risk varies from one
investment to the next and investments that are low in
one form of risk may be very high in other less obvious
types of risk. Nonetheless, when it comes to making
investment decisions, you wouldn’t want to avoid risk,
even if you could. Since risk and return go hand-in-hand,
the safer and more stable an investment is, the lower its
reward tends to be. Conversely, in order to earn a higher
return, very often you will need to accept a higher level
of risk.
Focus on the destination, not the dips
Mutual funds and other investments are often rated on
the degree of fluctuation in their share price. “High risk,”
“high beta” and “high volatility” are terms to indicate that
a fund has a history of price fluctuation. But for retirement
investors, those terms are like describing the depths of a
rollercoaster’s dips, but not its destination.
Focusing on short-term ups and downs makes sense if
you need your money in a matter of months or a few
years. But as your time horizon lengthens, the market’s
daily ups and downs become less important. When you’re
investing for long-term goals, it’s the overall direction of
your portfolio, and not its short-term price fluctuations
that really matters. While recent years have been rocky,
a look at market performance over time shows that stock
investing has been less of a rollercoaster than you might
think and more of a long-term uphill climb.
(continued)
Recalibrate your comfort zone
You may have spent a lot of time and effort putting
together an investment plan that’s right for you.
But have you checked on it lately? Your original asset
allocation may have veered off course in the past year
or so, given the sometimes dramatic ups and downs in
certain markets. Another reason to review your plan:
Your goals and circumstances may have changed since
you initially put your investment plan together. As a
result, now may be a good time to review your strategy
and re-establish your balance.
All investors have to confront risk at some point and
decide how much they’re willing to take. The key is
to understand your needs as an investor, balance your
potential risks and rewards so they match your needs and
time frame, and then step onboard! For more information
on risk as it relates to your asset allocation decisions,
visit mybmoretirement.com. In the Calculators section,
you’ll find an Asset Allocation Planner that can help you
determine your personal investing style and assist you in
deciding where to invest your retirement plan dollars.
For further information on financial planning
We invite you to visit mybmoretirement.com or
call the My BMO Retirement Line at 1-800-858-3829.
BMO Retirement Services is a part of BMO Global Asset Management and a division of the BMO Harris Bank N.A., offering products and services through various affiliates of
BMO Financial Group. Investment products are: NOT FDIC INSURED – NO BANK GUARANTEE – MAY LOSE VALUE.
©2012 BMO Financial Corp. 11-325-245 (09/12)