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5 essential risk management tips for investors

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Still-life of dollars with playing bonesInvesting, in and of itself, may seem like a risky venture for the average person, who probably understands little about finance in general (and even less about the stock market). And yet, people that invest wisely can make their money go a lot further, which is practically a necessity considering that people are retiring earlier, living longer, and often, facing rising medical costs for issues that require ongoing treatment throughout the twilight years. So, it really behooves you to invest if you can, and here are just a few ways to manage your risks in the process.



1. Diversify! You must have been living under a rock if you haven’t heard this one, but it’s truly surprising how many investors still choose to roll the dice by putting all of their eggs in one basket. Most of us use investments as a means of increasing our retirement savings, so to lose everything on one investment would be devastating. For this reason, you should not only have a 401K and a Roth IRA; you should also secure a diverse portfolio of investments that includes stocks, bonds, mutual funds, property, a savings account, and even gold bullion, just for good measure. The point is, a diversity of investments reduces the risk of total loss.



2. Get informed. If you were told you had a life-threatening illness that was untreatable, you wouldn’t take one doctor’s word for it. You’d get other opinions and start doing research on your own. Well, if you lose all your money on investments, your future will look pretty bleak. So don’t leave it to a stockbroker to make all the decisions for you. Become educated about investing so that you can make informed choices about where your money is going.



3. Avoid risky business. Let’s face it: some businesses just come with a higher risk of loss than others. Commodities, for example, are speculative, which makes them a rather volatile investment. Suppose the weather forecast calls for cold snaps in areas where oranges are grown, potentially leading to a shortage in crops. Investors could speculate that the price of oranges will go up and they might buy these commodities at higher prices as a result. But if the weather remains warm and stores are flooded with oranges (thus lowering their price), the commodities market will drop and investors will lose. Of course, commodities could also show major gains, but because the risk is so high you’re probably better off sticking with safer stocks and bonds.



4. Assess value versus cost. Even if a company looks good in the real world (little to no debt, possibly even money in the bank, continuing to grow and expand into new markets, etc.), it’s really no good to you if the cost of the stock far exceeds what you can expect to earn back in dividends or on a flat-out sale. So no matter how great a company looks, if it’s overvalued it constitutes a risk.



5. Ride it out. Loss control services won’t protect you from the ups and downs of the market, but if you’re willing to hang onto your stock despite market fluctuations, then you stand to come out ahead eventually (unless a business goes under). In short, be willing to ride out dips in your stock value. If you wait long enough it is bound to go back up eventually.




Evan Fischer is a freelance writer and part-time student at California Lutheran University in Thousand Oaks, California.

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