Investment Strategies

Every investor develops their investment plan with the highest of expectations. Over time, however, many investors abandon their long-term strategies due to short-term market swings. But a carefully-crafted plan should account for such volatility, allowing you to stay the course during volatile market climates. Staying on track will keep your plan from falling short or, worse, falling behind.

As you implement your investment plan, you'll want to consider the several time-tested investment strategies listed below. Keeping them in mind as you navigate the sometimes-choppy waters of the financial markets may help steady your returns, reduce your portfolio's volatility and keep your investment allocations aligned with your goals.

Balancing Risk & Reward

In exchange for return, all investments assume a certain level of risk. Risk is the possibility your investment will lose value. Indeed, some investments are more volatile than others, but no investment is risk-free.

Generally, investments offering the greatest return potential contain the highest degree of risk. For example, among the three major asset classes (stocks, bonds and cash equivalents), stocks historically have offered the highest returns. But, in exchange for those returns, stocks have experienced greater volatility than other types of investments. Conversely, bonds and cash equivalents have generated more modest returns and lower amounts of volatility. (see chart)

One of the best ways to temper portfolio volatility while maintaining attractive return potential is to diversify. And one of the best ways to achieve broad diversification may be to invest in mutual funds. By investing in dozens or even hundreds of securities, mutual funds may help reduce investment risk. And, when you invest in a handful of different mutual funds holding different types of securities, you further increase your level of diversification.

When selecting funds best-suited to your goals, you should consider your need for return versus your tolerance for risk. You also must consider your investment time horizon. Your time horizon is equivalent to the amount of time you have to achieve your goal. Typically speaking, the more time you have to reach your goal, the more risk you may be able to assume.

Remember this: The greatest risk you face as an investor may be investing too conservatively. Investing too conservatively could cause you to fall short of your goals. It could also mean losing your portfolio’s purchasing power to the effects of inflation.