Understanding Investing

Stepping Up the Risk/Reward Spectrum

See how various investments offer incremental opportunities for potential returns while still mitigating market risks.

In uncertain markets, investors may be holding larger than usual amounts of cash. Incremental “step-ups” in risk can potentially enhance returns while still managing volatility.

What this chart shows
Financial assets have unique risk/reward profiles. While cash carries the least risk, it also has the lowest return potential. Depending on their risk tolerance, investors can also look to bonds and equities for greater income or appreciation potential.

What it means for investors
No investment is truly risk free. While cash protects principal, its low returns may hinder you from reaching your financial objectives. You can step up your reward potential by prudently diversifying into riskier assets, which can help mitigate volatility while also keeping goals on course. However, it cannot assure a profit or protect against loss.

The relationship between risk and reward

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The Cost of Cash ‘Safety’

Unlike term deposits, the risk of bonds is often inversely correlated to equity risk. A portfolio comprising 60% equities/40% bonds had a higher annual return and lower volatility over the last 10 years than a portfolio of 60% equities/40% cash.

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Disclosures

A word about risk: The value of most bond funds and fixed income securities are impacted by changes in interest rates. Bonds and bond funds with longer durations tend to be more sensitive and more volatile than securities with shorter durations; bond prices generally fall as interest rates rise. Equities may decline in value due to both real and perceived general market,economic and industry conditions. Investing in foreign-denominated and/or - domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee, there is no assurance that private guarantors will meet their obligations. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Derivatives and commodity-linked derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Commodity-linked derivative instruments may involve additional costs and risks such as changes in commodity index volatility or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments. Investing in derivatives could lose more than the amount invested. Non-diversified funds may concentrate assets in a smaller number of issuers than diversified funds.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. ©2015