How to Manage Investing Risks?
"To make a mistake
is only human; to persist in a mistake is idiotic." - Cicero (106 - 43BC)
Reduce your risks by:
Setting your sights on
the long term, patiently riding with the ups and downs!
If you have the time to be patient, you can benefit from time
diversification. The more numerous good years for stocks outweigh the bad,
pulling your return up.
Thus, if you hold equities for many years, you can expect to
realize significant positive growth in your wealth.
Weeding out your
laggards!
Don't be too patient with laggards. This is the management risk
referred to earlier. Underperforming the market benchmarks is a big risk to
which many people are oblivious.
The more years you remain with a subpar performer, the greater
the damage to your nest egg. Weed out funds that have lagged their peers over
the past 18 to 24 months.
Avoiding hard-core market
timing!
It's not uncommon for hard-core market timers to move between
the extremes of 100% stocks during an up market to 100% cash when their
indicators signal a major turning point in prices.
Market timing is especially easy to do with mutual funds. Resist
the temptation.
Participation in the best up months is far more important than
avoiding the worst down months, and the really dramatic upward surges in stocks
are unpredictable, of short duration, and few and far between. Market timers
risk being in cash when the bull stampedes. Missing out can make a big difference
in your long-run returns.
Being disciplined and
using cost averaging!
Investing monthly in a specific stock is a great way to build
wealth and cope with market ups and downs. Your fixed investments buy more
shares when prices are down and fewer at higher levels.
Cost averaging can help people become more disciplined because
it encourages investing during market nadirs when individuals otherwise might
be too fearful.
A particularly good strategy is to double up on your investments
when prices are depressed, if you're able to. This will help enhance your
long-term performance, by further reducing your average cost per share.
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