In today’s economy, protecting your investment portfolio from inflation, deflation and market volatility is more important than ever. Making the right investment decisions can help investors of all ages meet their financial goals, whether those goals include purchasing a house, saving for retirement or bringing in extra income.
While a certain amount of risk is inherent in the stock market, you can still build a portfolio that weathers economic storms well. The investments you choose will depend on your personal risk tolerance and your financial goals.
Diversity Is Still Key
As always, diversity is still the watchword for savvy investors. Don’t invest all of your money into a single stock. Investing in multiple stocks is the way to go. Ideally, if one or even a few of your stocks do poorly, you’ll still be able to count on the stocks that are doing well.
Unless you have access to investment experts or are one yourself, however, you may want to skip picking individual stocks and put your money into strong mutual funds instead. Mutual funds take the collected assets of their investors and invest in multiple stocks and bonds.
You can enjoy great returns and dividends from mutual funds and benefit from the knowledge of the funds’ professional managers. Because mutual funds invest in multiple assets, you won’t have to worry about diversification. If you have money invested in a 401(k), you already own shares in mutual funds. If you don’t yet own any mutual funds, you should add some to your portfolio.
Consider Your Risk Tolerance
Your ability to cope with the possibility of losing money — both in practical and emotional terms — is known as your risk tolerance. Every investor’s risk tolerance is based on his or her financial goals, position in life and level of personal comfort with the possibility of losing money.
To determine your own risk tolerance, you first need consider your investment objectives. If you’re like most investors, you want to your investment portfolio to help you meet short, medium and long-term financial goals.
Short-term goals are those you hope to reach in one to three years; medium-term goals are those you hope to reach within six to nine years; and long-term goals are those you hope to reach ten or more years from now.
Your level of risk tolerance will vary depending on how much time you have to meet your goals. If you have 30 years to save for retirement, you can take more risks with your retirement portfolio because you have more time to recoup your losses. If you’re planning to retire in just a few years, however, you’ll want to be more conservative with your investments, since you have no time to make up any losses.
Either way, of course, it isn’t a good idea to take too many risks — even 30 years isn’t enough time to make up some losses. If you’re not comfortable with the thought of losing money, it’s better to take a more conservative approach so you won’t lose sleep worrying about your portfolio.
These days, experts are advising more investors to keep as much as 30 percent of their assets in cash as a hedge against hard times. A money market account offers a combination of high interest and FDIC insurance. If you want to invest for the short term or you have a low tolerance for risk, you can choose savings bonds, Treasury bills and bank certificates of deposit.
These investments are safest, but they also offer the lowest returns. You can achieve better returns by investing in mutual funds, but if you’re concerned about losing money, choose funds that invest in “sin” stocks like alcohol, tobacco and firearms — these funds consistently perform well even in bad markets. If you’re morally opposed to that idea, no problem; instead invest in “critical needs” stocks, like energy companies, for example. Gold is another safe investment vehicle that offers protection against inflation and market volatility.
No one likes the thought of losing everything in the stock market, but with a little know-how, you can build an investment portfolio that’s both safe and profitable. Keep your personal risk tolerance and your investment timeline in mind when making investment decisions and always do what you can to invest in strong companies.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.