3 Strategies to Help Reduce Investment Risk

Long-term returns are more likely to be good when individuals invest and stay invested. It's tempting to respond to changes in your portfolio by making financial decisions. Those who make financial decisions based on emotion generally purchase high and sell cheap. These investors struggle to accomplish their long-term financial goals.

How can you prevent typical investment blunders? Consider these investment methods to help you avoid risk and produce more consistent returns over time.

1.    Asset Allocation

Adequate asset allocation refers to how you weigh your assets to achieve a given goal, and it may be the essential component in your portfolio's performance.

For example, if you want to increase your money and are ready to incur market risk, you may invest up to 80% in stocks and just 20% in bonds. Before deciding how to allocate your portfolio's assets, consider your investment horizon and the risks and benefits of each asset type.

·         Diversification of portfolios

·         Diversification and asset allocation go hand in hand.

·         Can reduce an investment portfolio's risk by diversifying across asset classes.

·         Diversification across asset types may also help reduce portfolio volatility.

 

2.    Diversification of portfolios

If you invest in one company's stock, you're relying on that company's success to increase your investment. As a result of this "single-security risk," your investment's value fluctuates greatly with the price of one holding.

Buying investments in 15 or 20 firms from various industries reduces the risk of a large loss. A growing return on another investment may help offset a diminishing return on one.

Remember that this does not eliminate risk and does not guarantee loss.

3.    Cost Averaging

Average dollar cost is a disciplined investing technique that can help level out market swings. This method involves regularly investing a set amount in equities, bonds, or mutual funds. So you buy more when prices are low and less when prices are high. Your shares' average cost will normally be lower than their average price over time. This systematic approach might help you avoid making emotional investing decisions.