![]() ![]() Ultimately, it is a lot easier to effectively manage risk than investment performance. How an investor chooses to diversify will depend upon his or her own situation. The goal of diversification is to find the appropriate balance of different investments for your portfolio based on your investing goals, risk tolerance and time horizon-a process called “asset allocation.”ĭiversification can be achieved by company, industry, type of security, markets or by investment objective. The increases will help offset the decreases and minimize the impact of loss from a single type of investment. Ideally, in a diversified portfolio, some investments will increase in value while others will decrease in value. Because varying types of assets will behave differently depending on market conditions, a diversified portfolio that includes investments spread across a range of asset classes (e.g., cash, bonds, domestic and foreign stocks, and real estate) can broaden your investment base and lower your risk exposure to any single asset type. By using standardized risk measures, investors can make educated decisions about the suitability of an investment.ĭiversification is one of the most powerful and common tools that can help an investor manage and reduce risk. There are multiple ways to evaluate risk, many of which involve the use mathematical tools and techniques (e.g., standard deviation, beta, alpha and so forth). Unsystematic risks include business, financial and default risk, among others. Risks that are particular to a company, industry or class of investments are known as “unsystematic” risks, because they can be addressed (at least in part) by investing in more than just that one company, industry or class. Each investment is subject to general uncertainties associated with that type of investment, also known as “systematic risks.” These include market, interest rate and purchasing power risk, among others. With investing, just like in daily life, there are different types of risk. Also, it is important to remember that your risk tolerance will likely change over time depending on your evolving needs and goals. The potential rewards may just not be worth the stress and worry caused to you. ![]() ![]() If you are more risk averse than you initially thought, it could be difficult to sustain an investment strategy during difficult periods. In determining which investments best match your risk-return expectations, your risk tolerance is as important as the risk of the investment itself. This is referred to as our “risk tolerance.” Those who don’t mind taking on more risk in exchange for a higher potential return are considered “risk tolerant.” Conversely, those who prefer safer, more predictable outcomes and don’t want to take on a lot of risk are known as “risk averse.” Determining your risk tolerance is not an all-or-nothing proposition-most people fall somewhere between the two extremes of the risk tolerance spectrum. With more time, you’ll be able ride out market fluctuations and have more opportunities to achieve a higher return.Įach of us has a different ability to withstand investment risk. ![]() The length of time that you have to invest is known as your “investment time horizon.” Typically, if you have a longer time horizon, you can afford to be more aggressive and invest in higher-risk investments. Time also factors into the size of your potential returns and the amount of risk exposure that you’ll need to achieve your goals. ![]()
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