How to Reduce Risk

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With the constant instability of the stock market, it is essential to take steps in order to reduce the risk of your portfolio and mitigate issues that may emerge in a specific sector, region, or individual company.

Diversification strategies can be implemented to enhance the performance and stability of an entire portfolio. While it is impossible to eliminate risk entirely, these simple steps can help in the development of an optimal diversification approach, with some protection from the inevitable, damaging influences widely evident in the dynamic world of investment.

Don’t Put All of Your Eggs in One Basket

If an individual chooses to invest, for instance, in a company with a gold mine in Peru, one bad storm, machine breakdown, new regulatory measures, or a consumer preference for silver, can totally decimate the performance of the investment. To spread the risk and limit losses, establishing a variation in investments is the first step to help ensure a financial security.

Different conditions influence different types of investments, ranging from political and environmental, to economic and technological aspects. Spreading investments among stocks, bonds, mutual funds, ETFs, real estate, commodities, and futures, can mitigate threats by diversifying the portfolio and decreasing the potential impacts of negative macro conditions on the investment portfolio.

Variation in Risk

Investments, in general, are associated with many types of risk, including credit, systematic risk, foreign exchange, politics, interest rate, and market. Choosing to invest in assets with different risk profiles can curb the impact of certain types of risk factors and consequently reduce the overall hazard vulnerability of your portfolio. Practically, this means investing in some common stocks and some preferred stocks, ranging from blue chip to penny stocks. This strategic move helps offset losses and safeguard your portfolio.

Diversification by Sector

Another strategy for reducing portfolio risk, simply put, is to cast a wide safety net. Allocating investments to the sectors of healthcare, technology, energy, finance, and materials will reduce portfolio risk and lead to a more secure protection from economic downturns. Investments in companies of different sizes, regions, and interests can serve to further diversify your portfolio. A diverse portfolio increases the chances of consistent long-term returns on investment.

Everything in Moderation (Including Moderation)

While diversification is critical to limit potential downsides in investment performance, investing “safer” does not necessarily mean investing “smarter”. Limiting risk comes with the disadvantage of sometimes limiting significantly the rewards. It is important to determine the size and strength of the safety net so that is compatible with your personal investment style and comfort level.