New York, NY (PRWEB) April 26, 2005
Remember the old saw, "No pain, no gain"? It's as true for investing as it is for fitness training. There is absolutely no way to avoid risk when it comes to managing your investments--including burying your money in the back yard.
Members of the Armchair Millionaire community recently shared their insights into managing risk.
"Oddly, I'm taking more risk as I get older. That might be a function of experience. Investing is like playing golf on a windy day. Play conservatively until the wind favors your shot shape. If you plan on being in the winner's circle, never try to cut a long iron into a hook wind."
- Don B.
"I think the biggest risk is simply not taking one!"
- T. Hisaw
Too often, investors define "risk" as simply the possibility of losing all their money. But it's much more complex than that. My guide describes the major types of investment risks and how to manage them.
The Armchair Millionaire's Guide for Outwitting Risk
Market risk. This is what most people think of when they think of "risk": the market plunging and with it, the value of their investments. The antidote: Keep a long-term outlook. The market goes up and down from day to day, but history tells us that it goes up over time. If you're investing for 10, 20 or 30 years, you don't have to worry about what the market does this week.
Industry risk. This is the risk of a particular industry--pharmaceuticals or telecommunications, for example--hitting hard times, with a corresponding drop in that industry's stocks. The antidote: Nothing works better to reduce industry risk than diversification. If you have a broadly diversified portfolio suited to your situation that includes stocks (or better yet, stock mutual funds) from across all industries, you'll buffer your portfolio from downturns in any single industry.
Inflation risk. This is the risk faced by people who stick with "safe" investments, like U.S. Treasuries. While your principal may be safe, your returns will be matched or even outpaced by inflation, which erodes the real value of your money over time. The antidote: Keep at least a portion of your portfolio in the stock market, where you have a much better chance of earning returns that beat inflation.
Manager risk. Ever had a mutual fund whose manager chose lousy, under-performing investments? That's manager risk--the chance that your fund manager will simply make bad choices. The antidote: Buy index funds. Because they invest in the securities in broad market indexes, they eliminate the manager--and manager risk--from the equation.
Credit risk. Whenever you buy bonds, there's always a risk that the issuer of a bond may fail to repay its debt. The antidote: Stick with top-rated bonds, and steer clear of junk. Two well-known companies--Standard & Poor's and Moody's--rate the credit of most bond issuers, so you can have a clear idea in advance of their creditworthiness.
The Bottom Line: If you want the rewards that come from putting your money to work, you have to accept at least some level of investment risk. When you know the hazards out there, you can manage your investments to minimize the worst of them.
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Lewis Schiff founded the Armchair Millionaire Web site in 1997. His first book, The Armchair Millionaire, was published in 2001. Schiff's newest report, "How to Know When You Are Rich," is now available at http://www.armchairmillionaire.com.
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