Managing Risk

Investing is a process of balancing potential risk against potential returns, and offsetting risk as much as possible.

Conservative, lower risk investment vehicles (such as CDs) offer lower potential returns while aggressive, higher risk products (such as stocks) offer the potential of higher returns. Here are some examples:

• Stocks typically produce the highest returns but also carry the greatest risk over the short term. Historically, stocks provide the best return potential over the long term (5 to 10 years or longer), while over shorter period (such as 1 year) stocks generally decline about a quarter of the time. Therefore, the longer you able to hold stocks, the lower your risk becomes and the greater your chances of achieving your goals and receiving higher returns.
  
  
• Bonds are a lower-risk investment than stocks because they generally return 100% of the principal at maturity, but they fluctuate in value over their lifetime.
  
  
• Certificates of Deposit (CDs) are among the most conservative, lowest-risk investments but they generally offer a lower return.

A sound way to balance risk with the potential for higher returns is through an asset allocation strategy, which allocates the holdings in your portfolio across different asset classes.

Think long term

Another way to offset risk to stay invested for the long term. Markets will fluctuate up and down over the short term, but longer-term the trend is generally up. To reach your goals, you should think long term, no matter what the markets are doing.

During a "Bull" market (one when stocks are generally on the rise), making money may seem easy and short-term investors buy stocks for speculative reasons, anticipating a quick return. Many of them forget that prices can also decline in the short term. Alternately, during a "Bear" market (when stock prices are falling for long periods of time), investors often become nervous. Those who think short-term often sell out during Bear markets for fear of losing money. Long-term investors know that a Bear market is often the right time to invest in anticipation of a market turnaround when stock prices show good value.

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