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You can't live without taking risks. In many ways, how much risk you choose to live with is up to you.
When you drive a car, fly a plane, step outside your house or even stay inside your home, there's some sort of risk. When you buy stocks or invest in real estate, there is also risk. Everything you do or don't do has some sort of level of risk associated with it.
Saving money in guaranteed returns will place you in a comfort zone but will you be able to realize your financial dreams? Probably not. To stay ahead of inflation and make a good return on your money, you'll need to consider investing. By being too conservative because of your fear of risk, you may lose out on wealth building.
Diversification is a good insurance against risk. It is one of the best ways to protect yourself against risk. You can diversify in the stocks and bonds that you purchase for your investment portfolio. You can also diversify into real estate investments.
The first thing to do is determine what your financial goals are and how far away you are from retirement. If you have 30 years until you retire, you might be more comfortable with riskier investment products as you have plenty of time to wait out the lows.
A big mistake that many people make is putting money they won't need for a long time into investments that pay a low interest rate that doesn't even keep up with inflation.
On the other hand, if you are just a few years away from retirement, a risky investment might not be a wise decision. When you need the money, it may not be the most profitable time to cash out.
Investing in the stock market should be a long-term strategy. If you invest this way, you'll want to leave your investments for at least 10-years (longer if you can). According to the Standard and Poor's 500 Index, over any 20-year time frame, investors in the U.S. Stock market have never lost money.
How is that possible? Over time, the highs and lows have alwaysaveraged out to a positive annual return.
When investing in the stock market, it's important to avoid markets that are overvalued. A good example of this is the hard hits that the dot com companies took. Many of the dotcom companies and Internet related stocks have had such significant growth that they have literally become overvalued. Their value was based on what they would accomplish in two to three years. Since many were not meeting their revenue projections and they were overvalued, they fell significantly.
When you create an investment portfolio for yourself, diversify to minimize your risk. By diversifying, you spread your holdings among several different investments (stocks, bonds, etc.). This may lessen your potential loss in any one investment.
Diversification doesn't guarantee against loss but it is a method used to manage risk. Not only do you want to diversify your portfolio but also you will want to avoid overpriced stocks. There are plenty of fair and good valued stocks to choose from. When these investments fall (as we are seeing now) they usually fall faster and harder than fairly valued investments.
Diversification should not only occur with different sized companies but should occur by investing in different types of industries and different companies within each industry.
If you aren't up to the game of researching all the different stocks out there for a diversified portfolio, consider purchasing mutual funds, which are managed by professional fund managers.
Mutual funds diversify your investment by investing over a large number of companies. Professionals who do their best to maximize returns manage the funds for you. Mutual funds are not risk-free though. There is no guaranteed return. There are also fees associated with these funds for buying and selling shares and they can add up. Shop around and look for no load funds or compare fees between different funds.
Happy investing!
Doris Dobkins is a money saving expert, author and speaker and has helped thousands of people find ways to save money and get out of debt.
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