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Eliminate Risk from Your Investment Portfolio

By: Elite Legacy Education, March 15, 2017

Eliminate Risk from Your Investment Portfolio

If you were told that you had the option between two investments that provided equal returns, which would you choose? It may not really matter at this point which one you choose, but what if we said that “A” had a higher risk than “B.” Well, of course you would choose “B” since you can obtain the same rate of return for a lower level of risk. So knowing this, why wouldn’t you want to eliminate all the possible risk from your investment portfolio? Maybe you do but just don’t know how. If that’s the case, then we’re going to let you in on some secrets to doing exactly that.

 

First and foremost – diversify!

 

This will help to eliminate the non-systemic risk associated with each individual security and company you are investing in. Non-systemic risk refers to the level of risk associated with each individual security in your portfolio. This is in contrast to systemic risk which is market-wide. Here are some ways to diversify your portfolio.

 

  • The securities you select can already be diversified in and of themselves. This includes options like ETFs, mutual funds and index funds to name a few. These types of securities are pooled funds that invest in a number of underlying companies. Generally, these will be designed to match certain stock indices or represent particular industries. Either way, these are a great method of diversifying right down to the individual stock choice itself.

 

  • The combination of securities selected for your portfolio. A couple of examples include gold companies, which typically respond inversely to the overall market. If you can include stocks like this in your portfolio, then no matter whether the market goes up or down, you will have some positive stocks. The key is to have a portfolio that represents a number of companies across many industries. This way, the reliance upon a single or few stocks for high performance is shared among a larger number of securities.

 

  • In your asset allocation decisions. You may not even decide to keep all of your money in stocks since that could be considered too risky. In this case, you may diversify with other choices like real estate, bonds, cash and cash equivalents, or others. The overall risk profile of your portfolio is affected by your asset allocation. Replacing equity with other asset classes will generally bring the risk of your portfolio down. But it may do the opposite in some cases too depending on where you allocate your capital.

 

The world of derivatives.

 

The other option is to use certain derivative tools like options and futures. Essentially, you would use these to take the opposite position as you have taken on another asset. For example, if you had a long position on a particular company’s stock, then maybe you buy a short position in the form of an option contract. In the case that the company’s stock price rises, then you wouldn’t exercise the option. However, if the price dropped then you definitely want to exercise the option. This technique would minimize losses, but could also reduce gains. This strategy is otherwise known as hedging and is commonly used by traders. Other examples of hedging risk can involve forex trading and the commodities market.

 

Reducing your portfolio risk is just the first step. Take the next step here so you can level the stock market playing field by knowing what the professional traders know. Our Rich Dad Education instructors will introduce you to trading strategies that produce potential profit when stock prices are falling, and ways to lock-in gains, reduce risk, and squeeze extra money out of stocks in your portfolio.

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 The classes are very helpful in learning how to implement various strategies but the responsibility to put the knowledge into action falls on the student. Richard Cain. Aurora, CO

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