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.
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