Exchange Traded Funds and Risk Management
When planning your retirement investments, savings and risk tolerance are the two things that count most. In other words: how much can you put away, and how much can you afford to lose? If things go well, taking on more risk will translate to a higher payout—but it is a risk, so there’s a chance of losing your shirt and having to start over from square one. This is why it’s important to determine in advance how much risk your retirement savings account can bear.
The Good News About Risk
Risk, like temperature or rain, can actually be measured with some accuracy for certain asset classes. This makes it possible for you to dial your risk up or down according to your comfort level. In general, you want to maximize the ratio of reward to risk.
While many investment instruments expose you to different levels of risk, one of the best for hedging your bets is an indexed Exchange Traded Fund (ETF). Rather than investing in a single stock, an ETF allows you to invest in the entire stock market. The stocks mirrored by the ETF are highly diversified, representing many companies and sectors.
The stock market overall tends to perform better than any individual stock over long periods of time. This means that with ETFs, you’re not going to make a killing overnight, but you are more likely to grow rich slowly through constant exposure to the market. Skeptical? You don’t have to take our word for it—Warren Buffet also encourages people to invest in index ETFs.
The ETF Risk Factors
There are several risks involved in ETFs. First, there’s the overall volatility of the market, and no guarantee that the market won’t have a correction tomorrow and plummet 30%. On the other hand, as mentioned above, if you’re willing to weather the storm, market patterns indicate that you have a good chance of making that money back and then some.
Other risks are specific to each ETF. If you buy a biotech ETF, for instance, you might hold some of the most conservative biotech stocks or you might hold some of the most risky ones. Only index ETFs are exempt from those considerations.
How Much Risk is Right For You?
The algorithmic investment tools offered by FutureAdvisor can help you to save money on taxes and fees, and they also take a lot of the guesswork out of risk. Rather than having to evaluate every ETF for relative risk, you can simply set your risk tolerance at a certain level and let the algorithms select your investments.
Even larger than the risks associated with investing is the risk of delaying investing for your retirement—or never investing at all. Having cash is not an investment; it decreases in value through inflation every year.
The best way to ensure a sizeable nest egg for your retirement is to save early and often, and to max out your contributions to your retirement accounts every year. You don’t need to pay a high-end financial advisor commissions and fees to tell you that. FutureAdvisor can help lead you to the suitable investments with a minimal commitment of time and money from you.