6 Ways to Reduce Your Investment Risk
Everyone is looking for an easy way to get ahead - especially when it comes to Stock Market investing. Everyone wants to know how they can move toward financial freedom with little effort on their part. Well, there are no secrets out there - just hard work and dedication toward your money! You have to plan where you want to go and then work your plan. But there are some things you can do to reduce the effects of risk on your portfolio.
1) Never put all your eggs in one basket.
Some people think it's good to have all their money invested in only one type of security, such as stocks that pay dividends or growth stocks. The opposite is true! Instead, it would help if you had a portion of your money in each investment type so that the market fluctuations don't affect your entire portfolio.
2) Diversify within asset classes.
Diversification is important!! Although that doesn't mean you need to buy 100 stocks! You can still invest in mutual funds or exchange-traded funds (ETFs) that invest in various securities within a single asset class. Remember, diversification minimizes the risk of catastrophic loss, and it allows you to take full advantage of different types of investments. You can even buy one mutual fund that covers many different industries without having to spend your life researching all those stocks!
3) Spread out your purchases.
When you buy or sell securities, you need to decide when it's the right time to do so. Many people mistake buying all their shares in one security at once. Instead, they should gradually purchase more shares over time, known as dollar cost averaging . Another strategy is to divide your investment dollars among several stocks or funds.
4) Rebalance, don't react.
Keep your portfolio balanced between stocks, fixed income and other investments. But instead of making decisions based on the fluctuations in the market, rebalance your account when certain events happen - like once a year or when one asset class grows too large compared with other classes in your portfolio.
5) Know your goals.
When you know what you're saving for, you can develop a plan that takes different market conditions into account. For example, if you have set a goal to retire in 10 years, your investment strategy may be different from someone just trying to accumulate assets within their retirement plan.
6) Keep your eyes on the prize.
1 of the most collosal errors you could potentially make is buy a stock and then run a screen every day to see how it's doing! More time spent looking at your investments, means you are that much more likely you to panic when things start going bad - and that leads to poor decisions. As long as your strategy is sound and you have a set plan, then don't look at your portfolio every day. Remember, the market will fluctuate - so take a long-term view of your money.
By following these simple guidelines, you'll never have to worry about what the stock market does from one day to the next. Sleeping will be much easier each night knowing that your money is working for you, no matter how it performs in the short term.
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