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.
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:
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:
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.
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 decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
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.
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