Every investment portfolio needs a balance between safe and risky strategies. That's how you generate the largest returns possible while protecting yourself from investments gone wrong. No one can predict the future, but you can use this approach to help you find a balance that works well for you.
Stock Diversification: The Key to Balance
The worst thing you could do is invest all of your money in one company. Focusing on a single industry is the second worst thing you can do. A lot of investors would argue that focusing on one country also creates too much risk.
Diversification helps balance these risks by spreading your money out over several companies and markets. If you compare stocks to roulette, diversification is like putting your chips on several numbers instead of one: you greatly increase your chance of winning.
Don't Focus on the Short-Term
Don't listen to investment advisors who tell you to focus on short-term returns. It's not good for you, and it's not good for the economy.
Short-term investment strategies might work on occasion, but you can't rely on it to build the wealth you need for retirement. When you bet on the hot stock, you take a big risk. You could make a lot of money over night. But you could also lose a fortune over night. That's not the kind of high-risk game that benefits the average investor.†
Balance Risk by Seeing the Economy Clearly
A lot of media companies have pushed the idea that the U.S. and world economies haven't recovered from the recession. This position completely ignores the facts. Sure, the economy hasn't been growing at breakneck speeds, but it has been growing.
Without a clear view of the economy, you can't make smart investment choices. Instead of turning to sensationalistic news channels more interested in catching your attention than reporting the truth, get a mixture of opinions by watching reports from Fisher Investments YouTube Channel. You need advice from an expert, not someone trying to get higher ratings.
The Best Time to Take Risks
Young people naturally take more risks than older adults. Investing is one of the few times in life when brain development lines up with the way people should behave. Any investment expert will tell you that it makes sense to take more risks while you're young and to reduce those risks as you get closer to retirement.
If you're in your 20s or 30s, then you have plenty of time to make up for any stock crashes. Let's say your investment doesn't work out. You lose some money, but you can regroup and make new plans to fund your retirement. If the risk works out, then you have more money to invest at a young age. That means you have greater money-making power throughout your life. That's a risk worth taking.
Successful investing requires some luck, but knowing how to balance safe and risky options makes it more likely that you will succeed. What are some of the best investment decisions you have made? Just as importantly, what are some of the worst?