3 ways of managing investment risk
When it comes to your investments, risk or the uncertainty of returns is the price that all investors pay for the potential of receiving higher returns on their money than they might otherwise receive in a savings account. This risk most likely means you will have periods of positive returns and during some periods returns will be negative.
Here are 3 things you might do to help manage or even reduce your risk:
Reduce the individual business and credit risks by investing in thousands of securities, instead of individual stocks or bonds, by owning select mutual funds or Exchange Traded Funds (ETFs).
Diversify your holdings by owning both US and foreign stocks. Then combine various asset classes (like-kind investments) within the US and foreign positions that respond differently to various market conditions. You should consider no less than six or seven asset classes.
Invest a portion in high quality, short-term to intermediate bonds when added to smooth out so of the drastic ups and downs of stocks.
There is no way to reduce all the risk of investing and over short periods these 3 things may not be effective. But history has shown that for a long-term investor these three key strategies may help you be a more successful investor. After all, you’ve worked hard to set aside money for retirement, kids college or other financial goals so why accept more risk than you may need to.
In Ecclesiastes chapter 11, King Solomon reminds us to take prudent, diversified risk - "Ship your grain across the sea; after many days you may receive a return. Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth" ECCLESIASTES 11:1-2
Diversification neither assures a profit nor guarantees against loss in a declining market. Stock investing involves risks, including increased volatility (up and down movement in the value of your assets) and loss of principal. International markets involve additional risks, including, but not limited to, currency fluctuation, political instability, foreign taxes, and different methods of accounting and financial reporting. As a result, they may not be suitable investment options for everyone. Bonds are subject to market and interest rate risk. Bond values will decline as interest rates rise, issuer’s creditworthiness declines, and are subject to availability and changes in price.