It’s easier than ever to become an investor, thanks to lowered costs and increased access to the market. These developments are great, but I like to remind new investors: you’re still balancing the potential for making money with the possibility of losing it.
Managing risk is key to success. To help do that, I suggest these three principles:
1. Know your risk tolerance.
I often suggest asking yourself a few questions. Could you afford to lose much of the money you’re investing? How would you react? If the answers are “no” and “poorly,” you should invest in ways more in line with your risk tolerance.
2. Diversify.
Diversification means spreading out your investments across different asset classes and different types of investments within an asset class. The opposite, concentrating your money in a handful of similar investments, is typically not a good idea.
A healthy mix of assets can help reduce the impact of any single investment on your portfolio’s performance. When one asset class does poorly, others may do well. This can help smooth out the performance of your portfolio and potentially boost your long run returns.
3. Rebalance.
Once a new investor embraces the first two tips, I like to explain rebalancing. As the markets rise and fall, the investments in your portfolio will grow and shrink in value, and your portfolio could become either less or more aggressive than you intended.
By regularly selling positions that become overweight in relation to the rest of your portfolio and moving the proceeds to positions that have become underweight, you can bring your portfolio back in line with your initial risk decisions and keep the diversification you want. It’s a good idea to do at least once a year, and potentially more frequently if markets are making big moves. Keep in mind there may be tax implications and other costs associated.
Don Daigle is an Independent Branch Leader and Financial Consultant at Charles Schwab with over 29 years of experience helping clients achieve their financial goals. Some content provided here has been compiled from previously published articles authored by various parties at Schwab.
Don Daigle
Branch Leader
2184 North 2nd Street
Millville, NJ 08332
856-506-3412
Get Started at schwab.com/vineland-millville
Diversification, asset allocation, and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. The type of securities and investment strategies mentioned may not be suitable for everyone.
This information does not constitute and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.
