How Much Risk Are You Taking?

I think that the almost 400 point drop in the Dow Jones Industrial Average on Friday is a strong reminder that everything isn’t OK in the world of stocks. So how safe are your investments? Everyone has a Plan A when it comes to investing. Invest money and leave it alone. What is your Plan B when Plan A fails?

Most investors don’t have a sell strategy in place. When risk starts to increase, typically nothing is done. So, if the risk level is getting high in stocks, what move do you make?

You look at diversification. Diversification is a strategy where you divide your investments into different types of investment categories that don’t have a tendency to all move in the same direction. This strategy helps you minimize risk in your portfolio.

A diversification strategy would mean having your money divided between stocks, bonds, real estate, gold, alternative investments, and cash. Now you go about diversifying your investments depending on the type of plan that you are in. For example, a 401(k) plan is somewhat limited. You typically only have stocks and bonds and maybe a money market.

However, you have many more options in a general investment account held outside of a company with a financial advisor/broker or directly with a brokerage company. This is where you can diversify your portfolio with alternative investments. These types of investments are something to consider when the stock market risk gets high. However, if you are interested in alternative investments I would encourage you to have someone help you with that type of investing.

For the 401(k) plan, it comes down to how much you have in stocks and how much you have in bonds. For a very detailed look at how to invest in your 401(k) plan, read this article.

You also have to be careful with diversification. Diversification is not based on the number of investments you have in your portfolio. If you have 9 different stock funds, you have very little diversification with everything being in stock. Stocks tend to all travel in the same direction a high percentage of the time.

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