A target risk index seeks to provide diversified exposure to a blend of asset classes (such as stocks and bonds) aiming for a specific risk profile. This approach constructs a portfolio designed to maintain a relatively constant level of volatility over time. For instance, a “growth” focused strategy within this framework would typically allocate a larger portion of the portfolio to equities, anticipating higher returns but accepting potentially greater short-term fluctuations.
Managing risk within a defined tolerance band offers potential advantages for investors. It can help align investment strategies with individual risk preferences and financial goals, potentially reducing emotional decision-making during market downturns. Historically, such strategies have provided a smoother investment journey compared to portfolios solely focused on maximizing returns, offering a balance between growth potential and volatility mitigation.
