Investment is inherently risky. In order to make the best decisions regarding your investments, you have to manage that risk. Risks can be uncomfortable, but ultimately the reward could be well worth it. Taking a strategic risk could be very beneficial and lead to a higher rate of return.
The truth is that you won’t know what your return may be until you are ready to trade. There are historic rates of return that could help guide your decision making, but past return rates may not be indicative of future performance. Your investment may not meet your expectations! It happens. All types of investments are subject to risk, and there’s no way to escape that. With a plan, you may be able to help mitigate risk and potentially lower your risk of loss.
A few things you can do to help manage your risk include:
Make sure your portfolio is diversified.
Having a diverse portfolio can lessen the impact of a market downturn. I think your investments should be allocated into several different categories, like cash, stocks, and bonds. Even further than that, I think you should own stocks across several economic sectors. The goal of diversifying your portfolio is to help mitigate the risk of a downturn. By having multiple investments which theoretically should not move in the same direction at the same rate, you reduce the chance of a downturn having a significant impact on your portfolio as a whole.
Stay in it for the long haul.
Holding stocks over different market cycles and for longer periods of times helps to reduce the risk of receiving a lower than expected return. Stocks can be volatile and holding them for a longer period of time may help give you the chance to find the best opportunity to trade.
You can utilize dollar cost averaging to spread your investments out overtime instead of investing a lump sum all at once. Dollar cost averaging involves investing a certain sum of money in set amounts at regular intervals. That way, your purchases are spread over time and you’re less likely to be impacted by investing while the cost is high. Keep an eye on the market and utilize the set amount of money to buy more stocks when the price is low, and less when the price is high. This still won’t protect you against declining markets by itself, so stay vigilant and well aware of trends.
If you’d like to discuss how to help balance risk and return in your portfolio, please call.
*Any opinions are those of Roy Gray and not necessarily those of Raymond James. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.