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.
