It’s important to recognize the various forms of investment risk and to avoid owning too many investments that are subject to the exact same risk factors.
What are the different types of risk? For starters, there’s market risk the risk that you could lose principal if the value of your investment declines. Many investments are subject to market risk.
There’s also purchasing power risk the risk that fixed-rate investments, like Certificates of Deposit, won't even keep up with inflation.
If you own bonds, you could face interest-rate risk the risk that new bonds will pay a higher interest rate, thereby lowering the value of your bonds.
By spreading your investment dollars among stocks, bonds, and other vehicles, you can help diversify your investment risk. While this diversification can't guarantee a profit or protect against all losses, it may help reduce the impact of volatility on your portfolio and that’s a worthwhile goal.
Don't Fall Victim to Investment "Biases"
Did you know that investors often have “biases” that can harm their decision making? Here are a few of these biases to keep in mind:
Overconfidence Overconfident investors believe they always know the “right times” to buy and sell investments. But market timing can lead to expensive mistakes.
Representativeness If you suffer from a representativeness bias, you may think that just because a particular type of investment did well one year, it will do so again the next year.
Anchoring An anchoring bias may lead you to hold-on to an investment that has declined in value because you are convinced it is undervalued and will recover.
Confirmation You may experience confirmation bias if you seek out only positive information about an investment you're considering.
By avoiding these biases, you can help yourself stick with a long-term investment strategy that can help you work toward your goals.
Contact Wendell at Edward Jones www.edwardjones.com.