When markets start to fluctuate, it may be tempting to make changes to your investment portfolio. But history shows that those who stay invested throughout market and economic cycles are more likely to earn positive returns in the long run.
So how can you avoid making emotional investing decisions? Consider these three time-tested strategies that — coupled with personalized financial advice — can help mitigate risk, reduce volatility in your portfolio’s value and potentially earn more consistent returns over time.
Strategy 1: Asset allocation
Asset allocation refers to the way you weight the investments in your portfolio to meet your financial goals. It's the act of investing in different asset classes — such as stocks, bonds, alternative investments and cash — that should also take your risk tolerance, tax situation and time horizon into account.
How asset allocation can help reduce investment risk
Different asset classes offer varying levels of potential return and market risk. For example, unlike stocks and corporate bonds, government T-bills offer guaranteed principal and interest — although money market funds that invest in them do not.
As with any security, past performance doesn't necessarily indicate future results. And asset allocation does not guarantee a profit.
Strategy 2: Portfolio diversification
Asset allocation and portfolio diversification go hand in hand.
Portfolio diversification is the process of selecting a variety of investments within each asset class to help minimize investment risk. Diversification across asset classes may also help lessen the impact of major market swings on your portfolio.
How portfolio diversification can help reduce investment risk
If you were to invest in the stock of just one company, you'd be taking on greater risk by relying solely on the performance of that company to grow your investment. This is known as "single-security risk" — the risk that your investment will fluctuate widely in value with the price of one holding.
But if you instead buy stocks in 15 or 20 companies across several different industries, you can reduce the potential for a substantial loss. If the return on one investment is falling, the return on another may be rising, which may help offset the poor performer.
Keep in mind, this doesn’t eliminate risk, and there is no guarantee against investment loss.
Strategy 3: Dollar-cost averaging
Dollar-cost averaging is when you invest a fixed amount of money into the same investment vehicle(s) on a regular basis — such as monthly or quarterly, for example — regardless of how the market is performing.
How dollar-cost averaging can help reduce investment risk
With dollar-cost averaging, you naturally buy fewer shares when the market is high and more shares when the market is low. This systematic approach can help you gradually build wealth by diversifying the prices at which you buy more shares of a stock, for example. (Neither price appreciation nor profit is guaranteed, however.) And because this strategy is systematic, it can help you avoid making emotional investment decisions (thus minimizing investment risk).
We’re here to help keep you on track
If market developments are concerning you, it’s time to connect. We can provide advice and investment strategies that are personalized to your unique financial situation — so you can stay on track to reach your financial goals.