Tips and Tools For Financial Success - Newton Free Library

Risks that you can predict will occur—though not when they will happen—are known as systematic risks.
These risks are part and parcel of investing in the financial markets. While learning to accept risk as
a normal part of investing is necessary to your success as an investor, there are ways to minimize the
impact of systematic risks on your portfolio.
Allocating your portfolio across a broad spectrum of asset classes is a primary way to reduce systematic
risk. For instance, you might invest a percentage of your portfolio in bonds and bond funds, another
percentage in a variety of stock and stock mutual funds, including international stock as well as small-,
medium-, and large-company domestic stock, and another percentage in cash equivalents, such as CDs
and U.S. Treasury bills. Some investors also include real estate, precious metals, and other products in
their portfolios, often by choosing funds that invest in those products.
There are also certain market conditions when you may be able to find competitive investment returns
with comparatively less risk. For instance, when interest rates rise, bonds may offer returns that are on
par with some stock returns but with less risk to principal. That’s the case, in part, because they are less
volatile.
One of the biggest risks you may fall prey to, however, is trying to avoid risk altogether. If you invest very
conservatively or don’t invest at all because you’re afraid of losing your principal, you become vulnerable
to inflation, which can erode the value of your interest-bearing savings and investments over the longterm.
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