How to Manage Your Portfolio to Reduce Risk

There's risk involved in every type of investment.

Investing can be like gambling. When you invest, there is a measurable chance your investments may not gain or lose value. But it is also possible for you to earn reasonable returns on your investments. Every form of investment contains some risk, with factors including sudden market fluctuations due to economic news, inflation and credit risk. How these risks affect you depends almost entirely on your financial situation and where you invest your money. Reducing your risk requires a careful look at your portfolio and an assessment of your financial goals.

Instructions

1. Examine your investment options before choosing the classes of investments in which you would like to diversify. Evaluate your savings goals. Are you trying to generate money for your current expenses or do you want your investments to accrue value above inflation over time? Strike a balance between the return you hope to realize and the risk you can assume.

2. Diversify your investments instead of putting all your money in one asset. The danger of investing in one asset is that you risk losing everything at once. Invest in various assets whose fluctuation is not linked to insulate your portfolio from volatility. The options for diversification include stocks (both domestic and international), bonds, real estate investments, commodities and cash.

3. Look into the credit rating of the issuing entity before you purchase bonds. Moody's and Standard & Poor's are responsible for rating the risk of bonds and bond funds. A higher rating entails lower credit risk. Entities issue bonds to borrow money from other businesses and the general public. The bonds must be honored when they mature.

4. Consider the risk of inflation when investing in money markets, bonds and bond funds over the long term. Money markets, bonds and bond funds are usually the choice of conservative investors, but the returns can be diminished by inflation if it is rising faster than the gains.

5. Evaluate your financial position to determine if you can withstand short-term losses on your portfolio. Stocks offer a higher yield on your portfolio than other forms of investments because they can far outpace inflation. The longer the period of your investment, the higher the yields. Long-term investments, however, are subject to more spells of volatility and inflation. Balance your portfolio by devoting some of your money to equities and bonds.

References

• Dummies: How to Diversify Your Portfolio...
• Axa Equitable: Managing Risk In Your Portfolio
• Standard and Poor's: Manage Risk in Your Portfolio
• Los Angeles Times: Lesson 3: Protect Against Inflation

Resources

• Securities and Exchange Commission: Beginners' Guide to Asset Allocation...
• Financial Times: Investors Rush to Hedge Against Inflation Threat