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Balancing risk and reward

By Sheyna Steiner · Bankrate.com
Wednesday, February 2, 2011
Posted: 7 am ET

Many people prefer to err on the side of caution when it comes to investing. In the aftermath of the grim bear market of 2008-2009, it's difficult to question that impulse.

The most recent Merrill Lynch Affluent Insights Quarterly survey found that nearly half of affluent Americans consider themselves conservative investors.

The survey defines affluent Americans as those with investable assets of $250,000 or more.

Surprisingly, the survey found that 59 percent of younger investors, between the ages of 18 and 34, favor lower-risk investments.

Sixty-six percent of the investors who identify as conservative believe taking less risk will protect them from losses during market volatility. But only one quarter recognize that a conservative investing approach can mean sacrificing the opportunity to make more money.

In these dark days of dismal fixed-income returns, sticking with extremely safe investments can be an opportunity cost.

While investors should not take on more risk than they can comfortably assume, investing too conservatively may leave your financial goals shortchanged.

A financial plan can help strike a balance between risk and reward. A well-planned asset allocation strategy can mitigate the risks of market volatility by diversifying among a range of asset classes.

Of course, if your financial goals can be met earning 4 percent per year, there's no problem. If 4 percent per year will leave you cash-strapped in retirement, it may be time to explore new options.

Do you consider yourself a conservative investor? If so, how do you plan to meet your financial goals?

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