Understanding Investment Risk

One of the most important factors to consider when making decisions about your retirement investments is your tolerance for risk.

But what risks should you consider, how do those risks influence your asset allocation, and how can the investment options available through the UC Retirement Savings Program help you manage your risk while you save for the future?

All investing involves some risk, regardless of the state of the economy, and no investment is protected completely from loss. Each of the three primary asset classes—stocks, bonds, and short-term investments—comes with a different level of risk and varying opportunity for reward.

  • Stocks and stock funds bring market risk. Market risk is the possibility that events in financial markets and companies may lead to a decrease in the value of the investment.
  • Investors in bonds and bond funds, on the other hand, are subject to interest rate risk. Interest rates and bond prices generally move in opposite directions: when interest rates go up, bond prices go down, and vice versa. This effect is usually more pronounced for longer-term securities.
  • Finally, while it may seem safest in a roller-coaster market to preserve your money with short-term investments, doing so could expose you to inflation risk. That is, if the rate of inflation outpaces your interest rate, you could have diminished purchasing power.

Your Timeline Is Key

How much risk you take generally depends on how much volatility you can tolerate. You can think of volatility as a change in the value of your investment account, and your risk tolerance as how comfortable you are when it changes. Are you:

  • An aggressive investor with a high tolerance for risk? You aren’t likely to lose sleep at night when the market falls.
  • Risk averse? You’re probably uncomfortable at the slightest market fluctuation.

A major factor to consider when evaluating your risk tolerance is the amount of time remaining before you tap into your investment account. Are you:

  • Decades away from retirement? You may be better able to stomach a market downturn, since your investments have plenty of time to recover.
  • In or nearing retirement? You have less time to benefit from a potential market upturn and may worry more about a down market.

While changes in your life, not in the market, should drive portfolio decisions, it’s important to determine if recent market swings have increased your risk by pulling your portfolio out of balance.

Reassess your risk level and adjust your asset allocation accordingly. Keep in mind, neither diversification nor asset allocation ensures a profit or guarantees against loss.

How UC Pathway Funds can help

The UC Pathway Funds—a set of all-in-one funds—are designed to help you take on a level of risk that may be appropriate to the number of years you have until you need to start taking distributions. These funds invest in a disciplined mix of underlying UC RSP Funds, which are selected and monitored by the Chief Investment Officer of the Regents.

Over time, the percentage of assets a Pathway Fund invests in stocks, bonds, and short-term investments is adjusted automatically, becoming more conservative as the target date approaches.

Note: The investment risks of each target date Pathway Fund change over time as the Fund’s asset allocation changes. Assets held in the Pathway Funds are subject to the volatility of the financial markets, including equity and fixed income investments in the U.S. and abroad and may be subject to risks associated with investing in high yield, small cap, and foreign securities. Principal invested is not guaranteed at any time, including at or after their target dates.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

 

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