Getting started
Risk and time horizon
Rethink how you think about risk
Risk is more complex than a down market. One of the biggest risks is that you won’t reach your goal or won’t reach it within your time frame. That’s why time horizon — how long your investment has to grow — is also a factor in determining the right level of risk for your portfolio. Importantly, the shorter your investment time horizon, the greater the risk of loss on your investment.
How much time do you have to invest?
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1–10 years
Just around the corner
You might not even have a goal; you may just want your cash to work harder. Either way, it takes time for investments to grow, and investments can lose value.
If you only have a few years, you might consider a short-term fund, such as a money market fund or a short-term bond fund. With closer to 10 years, a balanced fund is an option to consider.
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10–20 years
In the future
Use asset allocation — spreading your investment across several different types of stock and bond funds — to hit your risk-reward sweet spot.
Consider looking for mutual funds that invest in dividend-paying stocks, such as an equity-income or a growth-and-income fund, as the dividend income can help provide a cushion in volatile markets. As you're exploring, you'll want to read each fund's investment objectives and strategies. For example, two different growth-and-income funds might have two different investment objectives and strategies to achieve those objectives.
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20+ years
The next stage in life
With a long time horizon you may be able to take on more risk with investments that offer long-term growth. Focus on growing your assets, as long as you’re willing to ride out the market’s inevitable ups and downs.
Consider a growth fund as a core portfolio investment.
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The risk of avoiding risk
When markets decline, it can be tempting to pull your money out until things calm down. But that could be a mistake. Even if you sell early in a downturn, it’s impossible to know the right time to get back in.
The chart below compares the returns of a hypothetical investment of $1,000 in the S&P 500 from 2011 to 2021.* Investors who remained steadily invested would have seen their $1,000 investment almost quadruple in value, growing to $3,790. However, investors who missed 40 of the best days during that period could see their investment top out at $1,005 — 73% less.
The lesson: Focus on time in the market, not timing the market.
Risk can work in your favor
Even the most conservative investors need to take on some risk if they want to reach their goals. The key is understanding (and respecting) risk in terms of your time horizon.
Looking at some common misperceptions may make risk feel less risky.
Learn more about investing
Now that you understand risk and time horizon, explore these other important investment concepts.
*The indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index.
Standard & Poor’s 500 Index is a market capitalization weighted index based on the average weighted results of approximately 500 widely held common stocks. Standard & Poor’s 500 Composite Index (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2022 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part is prohibited without written permission of S&P Dow Jones Indices LLC.
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