Price swings are a normal part of the market, and over time, are best managed with the appropriate diversification in your portfolio—that is the core of our investment philosophy. That means a successful investor with a varied portfolio can take advantage of the long—term gains associated with higher-risk assets (i.e., stocks) while maintaining stability and financial security with the right balance of lower-risk assets (i.e., bonds).

Diversifying your portfolio—or spreading your money across many different types of investments—is the best way to reduce investment risk.

The ideal mix of investments depends primarily on three things: your personal tolerance for risk, your current financial circumstances and your short- and long-term financial goals.

Your risk tolerance may be influenced by a number of things, such as your personality and life experiences, your overall sense of financial security or your understanding of typical stock market performance. A basic knowledge of the three main asset classes and the risk factors at play can help you identify the level of risk and the types of investments that are right for you.

There are three major asset classes, each with inherent risk and performance expectations.

• Stocks or Equities
  When you buy stocks, or shares, you are buying a part of a company. Investors can benefit from owning stocks in two ways – by receiving dividends (a portion of the company’s profits) or buy selling their shares at a higher price than they paid for them.
  
  Risk/performance: Stock prices fluctuate more dramatically than investments in the other two main asset classes. If the companies in the portfolio do well, over time they will outperform investments in the other classes.
• Fixed Income or Bonds
  When you invest in a fixed income asset, like a bond, you are loaning money to the government, a financial institution or a company. In exchange, the borrower agrees to pay you a set rate of interest for a specified period of time. When the bond matures (at the end of that time period) the organization returns your initial investment to you.
  
  Risk/performance: Fixed income investments are less risky than stocks because your interest payments are set at a fixed rate and are paid to you before profits are divided among stockholders. And unless the company defaults, you are guaranteed to get all of your original investment back.
• Cash Investments
  Cash investments are designed to deliver a set rate of return while keeping your money safe. They include bank accounts, guaranteed income contracts (GICs) and government Treasury Bills (T-bills).
  
  Risk/performance: Cash investments generally carry little risk, however they promise a lower rate of return than most other investments.

A basic understanding of the associated risks and benefits of the primary investment classes should begin to give you a sense of how much and what kinds of risk you are comfortable with. Now a simple Needs Assessment can help you analyze your individual financial circumstances and retirement objectives to help you determine the ideal mix of investments for your portfolio.