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Reduce Your Risk

April 5th, 2012 at 08:26 pm

For long-term investors, the stock market continues to offer the greatest opportunity for gains, and the greatest risk for losses. Here are five tips that may lower your stock risk:

1. Choosing mutual funds and exchange traded funds (ETFs) over a few individual stocks means your eggs are spread among more baskets. If you are creating your own portfolio with individual stocks, make sure those stocks are spread among different industries.

2. Choose funds and ETFs with low expenses. A mutual fund that charges you 1.5% annually compared to one that charges 1% may not seem like much, but it can mean thousands of dollars over a 20-year period.

3. Invest in different industries. Mutual funds and ETFs often do this for you, but itís also possible to latch onto funds that invest strictly in a particular field. Resist the temptation to predict the booming areas of growth over the next 10 or 20 years.

4 Invest globally. It can be hard for Americans to understand the industries of Brazil, China and Australia, but funds and ETFs with a global reach may give you greater diversification. Many American companies also have a strong presence around the world.

5. Have patience. The nearly 60% drop in the S&P 500 in 2008 and early 2009 proved that the stock market can wield cruel blows. Those who stayed put have regained most of what they lost. Those who jumped out near the bottom are poorer.

As the past 10 or 12 years have shown, there are no guarantees in the stock market. The good news is that the 30-year period from 1950 to 1980, and the 30-year period from 1980 to 2010, yielded nearly identical 10% annual gains in the stock market. Patience does pay off, but the journey to get there is rarely easy.

"If a business does well, the stock eventually follows." Warren Buffett

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