Risk vs. Reward in Successful Investing
Generally, the more profit you want to make on your investments, the more risk you will have to expose yourself to. Simple strategies for managing risk and return can help maximize your profits.
Keep a Diverse Portfolio
Don't have all your investment capital tied up in stocks, which can swing wildly in a volatile market. Especially if you are planning to retire soon, keep at least half of your capital in bonds, cash, and retirement plans. One possible rule of thumb, according to MSN Money Central, is to take your age, such as 40, and keep that percentage of cash and bonds in your portfolio, while the rest of your portfolio is devoted to stocks. This allows your investments to become less risky as you grow older and need the retirement savings.
Spread Your Investments Across Different Sectors of the Economy
As one economic sector becomes "hot," such as tech stocks or housing, it can create a bubble in which many companies in that area are overvalued but keep going up anyway, making them attractive prospects for investors. When reality catches up with the market's estimation, the value of these stocks can plummet, bursting the bubble and potentially doing serious damage to a portfolio that is concentrated in one economic sector. About.com advises that you mitigate risk by spreading your investments across several sectors.
Take Advantage of a Down Market
While risk can be, well, risky, certain circumstances can make investing in a company a more acceptable risk. One of these situations is a downturn that affects the market at large, suddenly making some companies a better buy. These companies are now undervalued by the current market, and when investor confidence returns, they may return to their previous value, making you a profit. However, it may take some patience to ride out a bear market.
Reduce Volatility
This strategy may disappoint excitement seekers, but a portfolio with a steady rate of return will almost always win out over a portfolio that wins big in some years and loses in others, as this article in Physician's News Digest demonstrates. And this eHow article reminds investors that a portfolio of smaller companies will generally be more volatile than a portfolio of larger companies. To reduce volatility, stay away from the trends of the moment and concentrate on sectors such as utilities, which move about the same, or less, as the market at large.