What even is risk tolerance?
Put simply by Investopedia, risk tolerance is “the degree of risk that an investor is willing to endure given the volatility in the value of an investment.” This makes risk tolerance a huge factor for each individual investor when it comes to deciding what to invest in and how much of their money to put towards any one investment.
A person’s risk tolerance might lead them to choose or avoid investments in exchange-traded funds for retirement savings or prefer a money market account over a stock purchase when they’re saving for a house down payment. And that’s where guaranteed and non-guaranteed returns come in.
How you get non-guaranteed returns
Non-guaranteed returns come from some of those riskier investments, like buying stocks, investing in mutual funds or exchange-traded funds, or purchasing cryptocurrency. As the name implies, non-guaranteed returns aren’t guaranteed. Your investment might grow over time, or it might lose value.
How you get guaranteed returns
Guaranteed returns often come in the form of dividends or interest on accounts like high-yield savings accounts, share certificates, or money market accounts. Another example of an investment with a guaranteed return would be Treasury Inflation-Protected Securities (TIPS), a type of treasury bond that pays interest, factoring in inflation. Based on the terms, you know exactly what to expect from your guaranteed returns upfront.
Pros and cons of non-guaranteed returns
The biggest con of non-guaranteed returns is the lack of certainty that comes with risk. Will stock prices rise or plummet? If your emergency savings is on the line (spoiler alert: it shouldn’t be) that risk just wouldn’t be worth it.
The big pro is certainly the possibility of high yields over time when you land on the right side of that risk-reward equation.
Pros and cons of guaranteed returns
Overall, the major con of guaranteed returns is that they don’t typically earn at rates as high as non-guaranteed investments. TIPS factor in inflation, so you don’t run the risk of inflation rising higher than your interest rate on an account. But other accounts and investment types usually don’t, so there’s always the chance inflation could outpace your dividend earnings.
But the biggest pro of all? You can count on a guaranteed return. So even though the yield might be lower, your money is safe. If you’re using a share certificate or money market account, your financial institution should insure the funds in that account (each account with RMCU is privately insured up to $250,000.00). So even if the worst-case scenario hits, you don’t have to worry.
Deciding which is right for you
Like so many things in personal finance, there isn’t a one-size-fits-all recommendation that is the right choice for everyone. And the right investment choice might vary depending on what you’re saving for, how old you are, or what stage you’re in of your financial life.
No matter where you are on that journey, RMCU can help you out. With high rates you can count on from share certificates and money market accounts, the guaranteed returns are just an application away*.
*Must qualify for membership. All checking accounts are verified with ChexSystems. By member’s choice, this institution is not federally insured. Each account is insured for up to $250,000.00.
Non RMCU links are being provided as a convenience and for informational purposes only; they do not constitute an endorsement or an approval by Rocky Mountain Credit Union of any of the products, services or opinions of the corporation or organization or individual. RMCU bears no responsibility for the accuracy, legality, or content of the external sites.
