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How to Reduce Investment Risk

Investment risk is the potential that you’ll lose the money you invest. Though you can’t avoid it, you can reduce risk and protect your portfolio with a few simple strategies. 

🤔 Understanding how to reduce investment risk

You can divide risk into two basic categories: systematic and unsystematic. 

Systematic risks affect the market and economy at large. These may stem from political happenings, inflation, and currency fluctuations. 

Unsystematic, or specific, risks affect individual companies or industries. These may include management shuffles, regulatory changes and product recalls. 

You can’t completely shield your portfolio from either type of risk. But a robust long-term strategy and a well-diversified portfolio can go a long way to minimizing such risks. 

Identify your risk tolerance

Your risk tolerance measures how much risk you can handle based on your age, financial situation, and time horizon. Knowing your risk tolerance can help you make smarter (read: risk-adjusted) long-term decisions. 

Pay attention to asset allocation

Asset allocation involves spreading your dollars among different asset classes like:

  • Stocks
  • Bonds
  • Commodities
  • Real estate

Robust asset allocation can decrease correlation, or the chance that two investments will move together in any given market condition. This can protect your portfolio during volatile markets by minimizing your risk of losses. 

Diversify your dollars

So how does diversification help reduce risk in investing? Diversification spreads your dollars across different assets, sectors, market caps, and regions. A well-diversified portfolio can reduce risk by smoothing returns and ensuring no one investment carries too much weight. 

Invest in index funds

Index funds are securities that track a specific index, such as the S&P 500 or Nasdaq Composite. Typically, they boast lower fees and better long-term performance than actively managed funds. They can also reduce risk by introducing automatic diversification from the start. 

Use dollar-cost averaging

Dollar-cost averaging involves investing a set amount of money at regular intervals, regardless of market prices. It generally pairs well with fund investing and can help you minimize risk by:

  • Smoothing out your averaging purchase prices
  • Encouraging investing regardless of market conditions
  • Minimizing the urge to “time the market”

Focus on time in the market, instead of timing the market

Day trading and timing the market can be tempting—but you’re likely to lose more than you make. By contrast, a buy-and-hold strategy gives your portfolio a chance to benefit from price appreciation, dividend payouts and reinvestments, and compound interest.  

Don’t sell at the first sign of volatility

One common mistake that investors make is selling out when the market hiccups. While exiting a bad investment can be a wise decision, dumping during a downturn only solidifies your losses. Instead, consider them an opportunity to snap up valuable investments at below-market prices and boost your long-term profits. 

What this means for you

Generally, there’s a correlation between risk and return. The riskier an investment, the higher your potential rewards. But if you only make “safer” investments, you may see lower returns in the long run. 

For most investors who aren’t on the cusp of retirement, taking risks can boost long-term investment profits. However, it’s important to not jump into risky investments willy-nilly. Instead, take some time to do your due diligence and calibrate your risk based on your tolerance and potential returns. 

Not all risk mitigation tactics suit every investor. That’s why Q.ai offers a variety of options to cater to all stripes, from risk-loving to risk-averse investors. Between our AI-backed strategies and variety of short- and long-term Investment Kits, you can mix-and-match the risk-reward tradeoff that works for you.

Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

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