Choosing High-Risk Investments: Fidelity's Guide To Volatile Markets

Choosing high-risk investments is a complex process that requires careful consideration of your financial goals, risk tolerance, and time horizon. Before investing, it is essential to assess your financial situation and emotional capacity to withstand market volatility. Diversification is a crucial strategy, spreading your investments across different asset classes such as stocks, bonds, and short-term investments. While stocks offer higher potential returns, they come with greater volatility. Fixed-income investments, such as bonds, provide more predictable returns but with lower upside potential. It is also important to understand the trade-off between risk and reward, conducting thorough research before committing your money. Fidelity offers a range of investment options, including brokerage accounts, IRAs, and various funds, each with its benefits and limitations. Seeking guidance from financial professionals can help you navigate the complexities of high-risk investing and create a plan tailored to your specific circumstances.

Understanding your risk capacity

Your risk capacity will also depend on your investment time frame. If you have a longer time horizon, you may be able to take on more risk as your investments will have more time to recover from any short-term losses. However, if you have a shorter time frame, you may need to be more conservative to avoid potential losses.

It's important to note that your risk capacity can change over time as your financial circumstances and emotional tolerance evolve. Working with a financial professional can help you accurately assess your risk capacity and create a plan that aligns with your goals and comfort level.

Additionally, when choosing high-risk investments, it's crucial to consider your desired level of risk, timeline, and involvement. High-risk investments, such as stocks, require careful research and diversification to manage risk effectively. Mutual funds and exchange-traded funds (ETFs) can provide a more diversified approach to investing in stocks, but it's important to understand the fees and minimum investment requirements associated with these options.

Choosing a level of stock market risk

Emotional Tolerance

Ask yourself how you would feel if the stock market dipped by 30% or more. Could you tolerate the volatility and uncertainty, or would it cause you stress and anxiety? Your emotional tolerance for risk plays a significant role in determining your investment strategy. If you have a low risk tolerance, you may want to consider more conservative investments or seek the guidance of a financial professional.

Financial Situation

Your financial circumstances also influence your ability to take on risk. If you have a stable job, sufficient emergency funds, and a comfortable financial cushion, you may have a higher risk capacity. On the other hand, if your financial situation is less secure, you may need to be more cautious with your investments.

Time Horizon

The time frame for your investments is another critical factor. If you're investing for the long term, such as for retirement, you may be able to withstand short-term market fluctuations in pursuit of potentially higher returns. However, if your investment horizon is shorter, you may need to opt for less risky investments to protect your capital.

Investment Mix

Diversifying your investments across different asset classes, such as stocks, bonds, and short-term investments, can help manage risk. Stocks tend to be more volatile but offer higher potential returns over the long term. Bonds are often considered lower risk but have a capped rate of return. By combining these investment types in your portfolio, you can balance risk and return.

Risk Capacity

Understanding your risk capacity involves assessing both the emotional and financial aspects of risk. Even if you have the financial means to take on risk, you may not be emotionally ready. Conversely, you might be emotionally prepared but lack the financial cushion to absorb potential losses. Knowing your risk capacity will help you make informed investment decisions.

When choosing a level of stock market risk, it's important to consider your emotional tolerance, financial situation, time horizon, investment mix, and risk capacity. Remember to seek professional advice if needed and to regularly review and adjust your investment strategy as necessary.

Diversifying your portfolio

To diversify your portfolio, you should have a mix of stocks, bonds, and other investments, and should diversify within those different types of investments. For example, you could invest in a mix of stocks, bonds, and short-term investments. Within stocks, you could invest in individual stocks and stock funds. Within bonds, you could invest in government and corporate bonds.

When diversifying your portfolio, it's important to consider your risk tolerance, financial situation, and time frame. Your risk tolerance refers to how much stock market volatility you're willing to accept. Your financial situation, or risk-bearing capacity, assesses your financial ability to weather declines in your account. Your time frame refers to how long you plan to be invested, which could range from a few years to a few decades.

It's also important to do your research and understand the risks involved with each investment. Diversification can help manage risk, but it does not guarantee a profit or protect against loss. The value of your investments may fluctuate, and you may gain or lose money.

Selecting a time frame for your investments

• Investment goals: Consider what you are investing for. For example, are you saving for retirement, buying a home, or funding a child's education? Defining your investment goals will help you determine the appropriate time frame. Retirement savings, for instance, typically involve a longer time horizon.
• Risk tolerance: Assess your emotional and financial ability to tolerate market volatility and potential losses. If you have a low risk tolerance, you may prefer shorter time frames that allow for quicker exits from volatile investments. On the other hand, if you are emotionally and financially prepared to weather market ups and downs, you may be comfortable with longer time frames.
• Investment horizon: The amount of time you can remain invested is crucial when choosing high-risk investments. Historical data shows that while aggressive growth portfolios may experience significant losses over a short period, they can also deliver higher returns over more extended periods, with reduced volatility. Therefore, a longer investment horizon can provide the potential for greater long-term returns from riskier assets.
• Financial situation: Evaluate your financial circumstances, including your income, expenses, and any emergency funds. If you have stable finances and sufficient savings, you may be better positioned to withstand short-term losses and thus opt for a longer time frame. Conversely, if your financial situation is less stable, a shorter time frame may be more suitable.
• Review and adjust: Remember that your investment plan should not be set in stone. Regularly review your investments, risk tolerance, financial situation, and goals. If your circumstances change, be prepared to adjust your time frame and investment strategy accordingly.
• Seek professional advice: Consider working with a financial advisor to help you assess your risk tolerance, financial situation, and investment goals. They can provide valuable guidance in determining the appropriate time frame for your high-risk investments and assist in creating a disciplined investment plan tailored to your needs.

Knowing when to seek professional help

• Major life events: If you experience a significant event that changes your financial situation, such as a windfall, inheritance, or job loss, a financial professional can provide guidance on how to manage your investments effectively.
• Diversification: If you want to diversify your investment portfolio but are unsure how to allocate your assets across different investment options, a financial adviser can help you create a diversified portfolio that aligns with your risk tolerance and financial goals.
• Risk management: If you are risk-averse or unsure about your risk capacity, a financial professional can assist you in understanding and managing the risks associated with different investments. They can help you assess your risk tolerance and create a plan to mitigate potential losses.
• Complex financial situations: If you have a complex financial situation, such as multiple income sources, substantial assets, or specific tax considerations, a financial adviser can provide specialised knowledge and strategies to optimise your investments.
• Time constraints: If you have a busy schedule or lack the time to research and manage your investments, a financial professional can handle the day-to-day tasks and provide ongoing advice and support.
• Emotional support: Investing can be emotionally challenging, and a financial adviser can provide objective guidance to help you make rational decisions, especially during market volatility or when facing difficult financial choices.
• Retirement planning: If you are approaching retirement or planning for the long term, a financial professional can help you create a comprehensive plan that considers your income needs, risk tolerance, and legacy goals.
• Specific investment products: When considering complex investment products, such as annuities, private equity, or specific types of funds, a financial adviser can explain the risks, fees, and suitability for your financial situation.

It is important to remember that working with a financial professional does not mean surrendering control. You can seek their advice and then make informed decisions based on your own judgment. Additionally, be sure to research and select a qualified and registered financial professional who aligns with your investment goals and has your best interests in mind.

Frequently asked questions