When it comes to investing, it can be tempting to think of risk tolerance as merely a matter of trepidation. But it’s far more than that. Your personal risk tolerance depends on factors such as how soon you’ll need the money, your overall financial goals, your ability to absorb losses and, of course, your personality.
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As the founder of Long-Term Mindset and a financial educator, Brian Feroldi helps teach everyday people how to pick the right kinds of investments for their own tolerance for risk.
“You work hard for your money, so before you put your money at risk, it’s critical to understand the different types of investments and how they stack up in terms of risk and potential return,” he said.
Feroldi recently shared a graphic on Instagram featuring 16 investing options organized by their levels of risk and expected return. Intrigued by his ability to succinctly articulate investing fundamentals, GOBankingRates connected with Feroldi as part of our Top 100 Money Experts series to understand where key investments fall within his ranking.
Feroldi explains that all asset classes exist within a risk-and-reward spectrum — in other words, each one offers a trade-off between risk and reward potential.
“At the safe end of this spectrum are choices like cash, money markets and U.S. Treasuries,” he said. “These are very low-risk assets but offer very little upside potential. You won’t get rich buying these.”
The bottom layers of Feroldi’s graph feature some of these safer options, which carry lower risks but not as high a return as other choices:
As Feroldi describes it, the decision about how heavily to lean into these kinds of investments may depend on your time horizon.
“If you need the money in a few years, leaning conservative may be smarter,” he said. “If you’re investing for decades, you can afford more risk.”
Editor’s note: Global stocks generally involve higher risk than bonds or Treasuries. They appear here because Feroldi’s original Instagram chart groups them at the lower end compared with other stock categories, but they still carry market risk.
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After placing real estate near the midpoint — more on that shortly — Feroldi ranks investment options that may carry more risk but offer higher expected returns.
“At the other end of the spectrum are ‘high risk, high potential reward‘ assets such as venture capital and emerging market stocks,” he said. “These assets are very risky but can offer spectacular returns.”
These assets include:
As you explore these options, Feroldi invites you to think about your risk tolerance. Ask yourself whether you could stomach watching your portfolio drop 30% in a downturn — or if that would keep you up at night.
“Every investment carries trade-offs, and the right balance depends on your personal situation,” he said.
Real estate investments occupy a unique position on Feroldi’s graphic. While he places them in the center of the spectrum, he also notes that they offer both equity growth and steady income.
“Property values can appreciate over time, while rental income provides steady cash flow,” he said. “That dual benefit makes real estate a compelling option for investors looking to build lasting wealth.”
However, real estate investing is far from risk-free, given the havoc a bad market cycle can wreak on your returns. There’s also the time, money and — if you’re doing it yourself — labor of property management.
Still, according to Feroldi, if you’ve got the interest and the resilience, real estate investing could be worth your while.
“Historically, real estate has been a popular engine of wealth creation precisely because it straddles both sides of the risk-return equation,” he said.
The old saying “Don’t put all your eggs in one basket” holds true for many areas of life — including investing.
Diversification is the investing equivalent of putting your nest eggs into different baskets — or, simply put, spreading your investments across the spectrum to balance potential gains with potential risk. One common strategy involves spreading your money across different asset classes — think bonds, U.S. stocks, international stocks and real estate — to reduce risk. If one sector is struggling, others can help offset your losses.
You can also build a diversification strategy based on your time horizon. If you need the money in a few years — for a house or tuition, for example — you might be better off with a mix of lower-risk assets such as money market accounts, U.S. Treasuries and municipal bonds.
Conversely, if you’re investing to meet long-term goals, you have the flexibility to introduce some higher-risk, higher-reward assets into your portfolio, such as small-cap or mid-cap stocks or stocks from emerging markets.
While you refine your strategy, Feroldi encourages you to ask yourself what your goals are. Do you want steady income or capital growth — or a mix of both?
“These questions guide how much equity — stocks, venture, international, etc. — versus fixed income — bonds, Treasuries, money market — you include in your portfolio,” he said.
Ultimately, it’s a good idea to meet with a trusted financial professional who can help you tailor a portfolio that will optimize your returns for the level of risk you’re willing and able to take.
Investing is about making smart choices, starting with the decision to learn about the spectrum of investment options based on the levels of risk and reward they can introduce to your portfolio. Working closely with a professional, you can determine which assets align best with your risk tolerance and financial goals.
This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Have a question of your own? Share it on our hub — and you’ll be entered for a chance to win $500.
This article is for informational purposes only and does not constitute financial advice. Investing involves risk, including the possible loss of principal. Always consider your individual circumstances and consult with a qualified financial advisor before making investment decisions.
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This article originally appeared on GOBankingRates.com: 16 Investments To Consider Ranked by Expected Return — From Safest to Riskiest
