3 Proven Market Investing Strategies for Risk Management

Market investing involves risks, it is a good idea to consider a few strategies to minimize losses. Regardless of experience level, a few overall strategies can be used by any investor. Although these strategies cannot assure that you will profit, or avoid losses, but they are used by professional investment managers and others as a way to minimize risk and increase the potential for gain. 

Strategy 1: Diversification

Diversification involves the balancing of different types of investments in order to minimize risk due to changes in the market.  Diversification goes beyond just choosing between different companies or types of stock but is part of an overall approach to looking at how different investments work with each other in an investment portfolio.

The most popular diversification method is using both stocks and bonds in a portfolio. It is a well published fact that historically stocks and bonds counterbalance loss. This relationship between stocks and bonds make them a perfect match in balancing the overall volatility of a portfolio. Put another way, the balance, reduces the risk of loss.

Strategy 2: Asset Allocation

Asset allocation involves varying the percentage of any one type of investment, within a general classification.  It is a more finite approach to diversification because it goes beyond the question of reducing volatility and focuses on increasing the potential return for the portfolio.  Asset allocation recognizes a need to readjust the percentage of certain investments as the market changes in time.  Asset allocation seeks to rebalance itself periodically to maximize the potential overall portfolio return.

Strategy 3: Dollar-Cost Averaging

Dollar cost averaging is a method for lowering the overall cost basis of a portfolio by taking advantage of the changes in a stock’s price purchasing 1000 shares of a stock at $25 will cost you $2,500.  Making a series of 4 equal purchases of $250 in the same stock over a 4-month period when the price moves up and down should result in a lower per share cost and higher number of shares.

Dollar cost averaging does not guarantee that a profit will be made in declining markets or that you will not lose money.  It provides a way to take advantage of price changes in the market and potentially benefit.