To continue enjoying all the features of Navy Federal Online, please use a compatible browser. You can confirm your browser capability here.

Bottom Line Up Front 

  • How you choose your investments will depend mostly on your comfort level with potential risks, or what’s commonly called your “risk tolerance.”
  • Two of the ways to manage risk are including a variety of investment types in your portfolio and not using money for investing that you’ll need in the next 5 years.
  • Navy Federal Financial Group advisors can take a comprehensive look at your overall finances and help you build a personalized investment strategy1.

Many of the ordinary things we do, like changing jobs or careers or tackling that first do-it-yourself home remodeling project, involve some risk. But, we do them because of their potential rewards. The same is true of investing—there are benefits and risks1. Your investments may not always perform as expected. They may perform better—or not as well.

How Should I Choose My Investments?

You’ll find that, in general, investments with higher risk, like stocks, offer the greatest opportunity for growth over the long term. More conservative investments, like bonds, usually offer lower risk, but they also earn lower returns. The least risky investments, such as money market accounts, provide the lowest growth potential.

How you choose your investments will depend on your comfort level, or what’s commonly called your “risk tolerance.” In simple terms, your risk tolerance is just how much of a difference in performance you’re willing to accept in your investments and whether you feel the potential for a high payoff is worth the possibility of lower earnings or loss.

Are There Ways to Manage Investing Risk?

No one likes the idea of losing money. There are a few strategies you can follow to help reduce the impact a dip could have on your portfolio.

  • Set aside investing dollars for the long-term. It's important to keep in mind that there will be ups and downs, and hopefully, the ups will make up for the downs. A good rule to follow is not to use money for investments that you’ll need in the next 5 years.
  • Focus on asset allocation. A simple explanation of asset allocation is deciding what percentage of your money will be invested in stocks, bonds or cash equivalents. The reason behind this is that if one class (type) of assets doesn’t do well, but another is really performing well, it may balance out losses.How you choose the percent you’ll invest in each type probably will depend on how many investing years you have ahead. If, for example, you have many years of investing ahead, you might decide to put more of your money into stocks. If you need the money sooner, you might have a larger percentage of your portfolio in more conservative investments, but also keep some stocks for future growth potential.
  • Diversify. Spreading out investment dollars among different types of industries is a method investors use so that no single investment is likely to have an outsized effect on the entire portfolio.1 For example, you wouldn’t necessarily want to put a big chunk of what you have to invest in a single company or industry.
  • Consider systematic investing (also called dollar-cost averaging). Historically, we’ve seen that those who invest regular amounts of money at fixed intervals (instead of trying to time investments to when the market is favorable) tend to have portfolios that do better over time.1 This strategy can help remove the emotion from investing decisions.

How Much Risk Should I Take?

Figuring out how much risk to take is a big decision, and it’s one that’s likely to change as your circumstances change. So, you’ll need to reevaluate your plan periodically. A lot of it will depend on your goals, how much growth you want, how long you have to invest and how much you could afford to lose—if it came to that. The closer you get to retirement, the more conservatively you’d want to invest.

To begin, look at your goals, age and risk tolerance. In addition to your paycheck, include other sources of income (pensions, Social Security, etc.) and assets, as well as your tax situation in your plan. Many experts suggest looking for investments that at least cover inflation (historically about 3%), so that you preserve the value of your money and your buying power.

If you’re still unsure how much risk you’re willing to take, Rutgers University developed an investment risk tolerance quiz that may help you get an idea of your comfort level.

What Are Some Common Investment Terms I Should Know?

Reading as much as you can about the ins and outs of investing is a good idea. Some terms you’ll see over and over are liquidity, business stability, market volatility, credit and default, inflation and foreign investment. Here’s a basic primer on what they could mean to you.

  1. Liquidity. This term refers to how easily you can convert your assets or investments to cash and whether they can be sold at stable prices. An illiquid investment (e.g., partnership shares, hedge funds) means you may not be able to sell quickly because there’s little or no demand for your investment, and it’s harder to determine its fair market value.
  2. Business stability. When you buy stock or bonds in a particular company, if it loses money or goes bankrupt, the value of your investment could go down or even become worthless.
  3. Market volatility. This term refers to when the stock market is unstable. In a volatile market, there’s a greater chance that your investments could lose value because it’s acting unpredictably. It usually happens because of a difficult economy or unexpected changes and can affect an entire investment class (e.g., stocks or bonds) or just a particular sector of the market (e.g., technology, energy, health care).
  4. Credit or default. If you’re interested in buying bonds, you should check the bond issuer’s rating, so you’ll know how likely they’ll be able to make the promised dividend payments. In a default situation, you could lose some or all the dividends and possibly even some of the principal you invested.
  5. Inflation. When people talk about inflation, they mean how prices rise and how it affects buying power—for goods and services and for investments. Why does that matter? Because, as prices rise, your investments may not keep up. Here’s an example. Suppose annual inflation is 3 percent, but your investment only earns 1 percent. That 2 percent difference will affect how much you can buy and how much money you’ll make on your investments.
  6. Foreign investment. Buying foreign stocks may help you diversify your portfolio, but it does involve more risk. Many of these markets don’t have the same level of oversight as U.S. markets and are more likely to be affected by events like a sudden political change—which can have a devastating effect on their economy. You’ll also need to account for fluctuations between the value of the foreign money and the U.S. dollar. Other risks for foreign investments may include differences in legal or accounting rules.

Get Help With a Personalized Strategy

If you’d like to discuss how to balance your risk tolerance with your financial goals, one of our Navy Federal Financial Group advisors will take a comprehensive look at your overall finances and help you build a personalized investment strategy. If you already have a plan in place, we can help you decide where and when it may need adjustments. Visit our contact page to find an advisor near you, or give us a call at 1-877-221-8108.

1Navy Federal Financial Group, LLC (NFFG) is a licensed insurance agency. Non-deposit investments, brokerage, and advisory products are only sold through Navy Federal Brokerage Services, LLC (NFBS), a member of FINRA/SIPC and an SEC registered investment advisory firm. NFBS is a wholly owned subsidiary of NFFG.  Insurance products are offered through NFFG and NFBS. These products are not NCUA/NCUSIF or otherwise federally insured, are not guaranteed or obligations of Navy Federal Credit Union (NFCU), are not offered, recommended, sanctioned, or encouraged by the federal government, and may involve investment risk, including possible loss of principal. Deposit products and related services are provided by NFCU.  Financial Advisors are employees of NFFG and they are employees and registered representatives of NFBS. NFBS and NFFG are affiliated companies under the common control of NFCU. Call 1-877-221-8108 for further information.

2Neither diversification nor systematic investment can guarantee a profit or protect against loss in a declining market.

This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.