Minimizing Investment Risks

There are many different types of investments, and the safest one is usually 1-year CD’s currently around 5 percent. To gain more than that per year, one must assume a certain amount of risk. Depending on the amount of risk that you can afford, there are investments such as bonds, options, commodities, real estate, etc. The main thing you are looking for is to create a portfolio that statistically has a higher rate of return than the safe route of CD’s. The best way to receive these returns is to focus on minimizing possible losses. All investments carry some risk, so they will usually offer more than the CD rate, which means if you minimize the losses you are more likely to gain more than this rate over time.

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There are two main strategies to accomplishing this goal. The first strategy is to spread out the risk as much as possible. The more different types of investments you have, the less likely that a loss in one of them will make you have a loss overall. If you do not have a lot to invest and have limited access to information, it is better to use strategies like mutual funds and indexes. Each share will already consist of many different stocks, so the chances of an unexpected catastrophe creating a loss is minimized. Since some of these types of investments focus on a specific area, you can use that to adjust the total risk to a comfortable level. These can also be used to focus on a specific market sector like technology, health care, energy, or anything else that you expect other people to spend a lot of money on in the future.

The second strategy is to optimize the liquidity of the investments, as keeping your money in an investment for a longer period of time usually offers the best returns. Frequently long term investing also has tax benefits as well. The most liquid investments are savings accounts, which pay slightly more than the zero percent of a checking account. Stocks and real estate usually have better returns over very long periods of time than investing in CD’s. The disadvantage to both of these is the cost of buying and selling the investment, as well as the possible cost of selling at a low point in the market. This is more of a problem if you have borrowed additional money to buy the stocks or real estate so you are forced to sell at a lower point. This is another advantage of having part of your savings in an easily accessible form, even if it is at a lower rate, because it can be quickly transferred to another account to prevent a forced sale at a loss.

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