Many people focus on the risk of market volatility, the possibility of losing money through market fluctuations. However, they may not give enough attention to inflation risk, the possibility that their investments will not grow sufficiently to stay ahead of rising prices.

Peoples’ exposure to each type of risk should depend upon their time horizon, the amount of time before they will begin drawing upon investments to meet their expenses. If you’re an investor with a long time horizon the impact of market volatility on your your portfolio may not be as important as inflation risk.

Focusing more closely on current market volatility rather than the effects associated with inflation in the long term is known as availability bias. This is the tendency to pay undue attention to facts or events that are immediately available or easy to imagine. For example, there may be a propensity to worry more about declines in stock prices, which can be sudden, and less about increases in the costs of goods and services, which usually occur gradually.

By considering the fundamental trade off between inflation and market volatility, someone can build a portfolio with the appropriate mix of growth and income investments. Understanding how these risks work and how to manage them over time can increase your potential to meet your financial goals.

Outline a strategy to allocate your assets appropriately for each goal. Keep in mind that market fluctuations could interfere with your ability to reach short term goals, while inflation has relatively little impact over shorter time periods. You can afford some market volatility as a long term investor, and you need growth potential to keep pace with rising prices. It’s important to remember that your ability to withstand these fluctuations increases as your time horizon increase.