There are two main ways to reduce risk. First, diversify within each category of investment. You can do this by investing in pooled arrangements, such as mutual funds, index funds, and bank products offered by reliable professionals. These investments typically give you a small share of different individual investments and will allow you to spread your money among many stocks, bonds, and other financial instruments, even if you don’t have a lot of money to invest. Your risk of losing money is less than if you buy shares in only a few individual companies. Distributing your investments in this way is called diversification.
Second, you can reduce risk by investing among categories of investments. Generally speaking, you should put some of your money in cash, some in bonds, some in stocks, and some in other investment vehicles. Studies have shown that once you have diversified your investments within each category, the choices you make about how much to put in these major categories is the most important decision you will make and should define your investment strategy. This is important as your retirement living depend on it.
Why diversify? Because at any given time one investment or type of investment might do better than another. Diversification lets you manage your risk in a particular investment or category of investments and decreases your chances of losing money. In fact, the factors that can cause one investment to do poorly may cause another to do well. Bond prices, for example, often go down when stock prices are up. When stock prices go down, bonds have often increased in value. Over a long time — the time you probably have to save for retirement — the risk of losing money or earning less than you would in a savings account tends to decline.
By diversifying into different types of assets, you are more likely to reduce risk, and actually improve return, than by putting all of your money into one investment or one type of investment. The familiar adage “Don’t put all your eggs in one basket” definitely applies to investing.
Second, you can reduce risk by investing among categories of investments. Generally speaking, you should put some of your money in cash, some in bonds, some in stocks, and some in other investment vehicles. Studies have shown that once you have diversified your investments within each category, the choices you make about how much to put in these major categories is the most important decision you will make and should define your investment strategy. This is important as your retirement living depend on it.
Why diversify? Because at any given time one investment or type of investment might do better than another. Diversification lets you manage your risk in a particular investment or category of investments and decreases your chances of losing money. In fact, the factors that can cause one investment to do poorly may cause another to do well. Bond prices, for example, often go down when stock prices are up. When stock prices go down, bonds have often increased in value. Over a long time — the time you probably have to save for retirement — the risk of losing money or earning less than you would in a savings account tends to decline.
By diversifying into different types of assets, you are more likely to reduce risk, and actually improve return, than by putting all of your money into one investment or one type of investment. The familiar adage “Don’t put all your eggs in one basket” definitely applies to investing.
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