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Survey: Many Investors Misunderstand Risk-Return Relationship

A new TIAA-CREF survey finds more than half of investors look to short-term performance factors when making investment decisions, while nearly one-third mistakenly believe all investments carry the same overall level of risk.

According to the survey results, 36% of investors look to one-year performance as the “most important indicator of an investment’s return,” with an additional 16% looking to quarterly performance as most important. They survey also found that nearly half of investors have purchased a fund “based on its performance during the previous year rather than looking at its performance over a longer-term investment horizon such as five or 10 years.”

In addition, the survey found that many investors misunderstand the nature of risk. The results show that 71% of Americans believe they can eliminate investment risk entirely by having a diversified portfolio; 53% think that higher risk guarantees higher returns, and 29% believe all investments offer the same level of risk.

Lastly, 36% of respondents said market volatility is the No. 1 reason they would rebalance their portfolio. Other reasons include nearing retirement (23%); regular time of the year such as the end of the year, your birthday, or some other significant date (21%); and life choices such as marriage, birth of a child or grandchild, death of a spouse or similar situations (20%).

When choosing an investment, however, it is important to look beyond its recent performance. You must also consider when you will need to use the money and how much risk you are willing to take. We each have our own investment time horizon, so we must invest our funds accordingly.

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