How long have you been investing? Even if it has been a short time, you already realize how volatile the markets can be. While it may seem like there is little you can do to avoid the impact of market volatility on your portfolio, you can take some prudent steps to help you reach your financial goals over time.
And since year-end is approaching, now is the best time to consider investment alternatives and strategies.
One of the things almost every financial advisor will guide you in is the fundamental principle of investment diversification. That's the practice of spreading your investments around so your exposure to any one type of asset is limited.
Because your asset types are diversified, your risk exposure is reduced regarding volatility in your portfolio.
Diversification typically divides your portfolio into investment types, including equities, fixed-income investments, tangible assets and cash. The percentage of each essentially will determine not only your potential for risk, but your potential for returns.
Several other investing strategies also can help limit the impact of market volatility on your portfolio.
One investment strategy you might discuss is dollar cost averaging. This strategy involves regularly investing a fixed amount of money. It is advantageous because it forces you into investing under all market conditions, making you a habitual long-term investor.
Another advantage results from investing the same amount with each regular investment. You will purchase more shares when shares cost less, but fewer shares when share prices are up. But over the long run, your share prices will average out.
Dollar cost averaging is a great long-term investment strategy because it tends to work regardless of market trends.
But there comes a time to sell for almost everyone, and that's when systematic selling may be the appropriate strategy. This involves selling select investments at predetermined intervals in specific dollar amounts.
It is advantageous in reducing portfolio holdings that have been overly invested in a single stock, mutual fund or class of investment.
Because you can frequently schedule these sales when they are most advantageous based on share price, as opposed to having to sell when shares are down in value, this strategy may need to be part of your sound portfolio management.
Many stocks and mutual funds are attractive to investors because they pay dividends. But if you do not need those dividends for everyday expenses, they are probably best reinvested automatically. Reinvestment of dividends is one of the easiest ways to increase your shareholder stake in the companies you own (through stocks or bonds) or the mutual funds you hold and in building your total wealth.
Strategic investing practices can help you gain greater control over your portfolio by limiting emotional decision making in purchasing and selling investments. In addition, the strategies discussed here potentially can help you become less susceptible to the swings in the financial markets by stabilizing your portfolio.
Always consult your financial advisor or broker to determine any financial strategy before implementing a change. And thanks to my own current financial advisor for providing this kind of sound advice.
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