Managing Portfolio Risk
You can't eliminate risk, but you can manage it intelligently. Diversification, asset allocation, and rebalancing are your primary tools.
Diversification
Don't put all your eggs in one basket. Own different asset classes (stocks, bonds, real estate), different sectors (tech, healthcare, finance), and different regions (US, international). When one zigs, another zags, smoothing overall returns.
Asset Allocation
Your mix of stocks, bonds, and other assets determines most of your portfolio's risk and return. A simple rule: subtract your age from 110 to get your stock percentage. At 30, that's 80% stocks, 20% bonds. Adjust based on your personal tolerance.
Aggressive (90/10)
- Higher long-term returns
- More volatility
- Best for young investors
Moderate (60/40)
- Balanced approach
- Moderate volatility
- Classic retirement allocation
Conservative (30/70)
- Lower returns
- More stability
- Near retirement or low tolerance
Rebalancing
Over time, your allocation drifts as assets perform differently. If stocks surge, you might go from 70/30 to 80/20. Rebalancing sells winners and buys losers to restore your target. It's systematic "buy low, sell high."
- Diversification reduces risk without sacrificing expected returns
- Asset allocation (stock/bond mix) is your primary risk control
- Rebalancing maintains your target risk level over time
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