To answer this question, there are two things you first need to determine: your personal risk tolerance and your time horizon. Risk tolerance is your comfort with the unpredictable and uncertain nature that may come from an investment. Time horizon is the length of time before you begin withdrawing the funds.
How Comfortable Are You with Risk?
Some investments carry a higher level of risk than others. Generally, the higher the risk of an investment, the greater its potential returns. The lower the risk, the less likely it is for that investment to generate a higher rate of return.
To help determine your risk tolerance level, ask yourself, "How comfortable will I be watching my investment go up and down in value?". The more comfortable you are with price changes, the greater the risk you may be willing to take.
How Quickly Do You Want to Meet Your Goal?
Time horizon is an important part of planning your goals. Generally, the more time you have, the more risk you may be comfortable with. The reason: the longer your time horizon, the more time you have to ride out the market's ups and downs in pursuit of your financial goals.
Selecting the Right Funds
Once you know your time horizon and the risk you feel comfortable with, you can focus on investments that you believe are suitable for your personal financial situation. Selecting the right mix of investments will help you achieve your long term financial goals.
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