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Understanding the Risk/Reward Spectrum

Learn 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

Disclosures

A word about risk: Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. 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.

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 is a registered trademark of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. © 2016 PIMCO

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