Investing For Beginners – Free Investment Articles and Tutorials

In our everyday lives we act to control our exposure to risk by doing things such as checking the weather forecast before leaving the house. The investment world has risk-reducing strategies, too. These range from highly sophisticated mathematical strategies to classic, proven methods available to every investor.

Here are five broad and proven strategies for controlling investment risks:

Diversification

This strategy–built right into all mutual funds, which are diversified portfolios–spreads your risks and opportunities. The result should be a combination of less hurt and less gain. It’s simply the investment version of not putting all your eggs in one basket.

Investing systematically

You can put price fluctuations to work for you and actually reduce the average price you pay for shares in a mutual fund by investing identical amounts on a regular basis. The secret is you’re buying more shares when the price is low and fewer when prices are high. (Of course, dollar-cost averaging does not guarantee a profit or protect against a loss in a constantly declining market.)

Investing for the long term

Ignoring short term fluctuations in investments (not being overly enthusiastic or overly concerned) and focusing on the long term is a proven risk control strategy. In fact, the longer you stay invested, the less likely it is that you’ll experience a negative return.

Time is on Your Side
Even the worst 20-year period in history for large company stocks still left investors with a 3.1% compound annual return, nearly the same as the 3.7% average return for Treasury bills. For investors who held large company stocks for 20-year holding periods between 1926 and 1995, the average annual total return was 10.5% and none of those holding periods experienced a loss. On the other hand, for investors who held onto the same kind of stocks for one-year holding periods, returns ranged from more than 50% to losses greater than -30%.

Employing professional management

A seasoned, full time investment manager–another benefit built into mutual funds–may help you reduce your risk while increasing your return. Consulting with your professional financial advisor can lead to selecting professional managers most suitable for you and your goals.

Seeking the advice of a financial advisor

Your financial advisor can help you establish realistic goals and a plan to achieve them. Your advisor can also help you allocate and diversify your assets so that your portfolio risk and potential return are tailored to your investment personality. He or she can then help you monitor and re-adjust your portfolio over time to ensure that you stay on track toward reaching your investment goals.

Once you’ve identified the potential risks, understood their likelihood of occurring as well as their potential impact, and reviewed the available risk control methods, it’s time for Step 4: evaluating the risk/reward tradeoff.

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