With the S&P 500 making new all-time highs on a weekly basis, many investors are starting to get nervous about stock prices. While no portfolio is entirely risk-free, there are several ways that every investor can keep risk in check.
Here are four common ways to manage the risk in your portfolio.
The simplest, most effective way to reduce risk in a portfolio is to own many different types of investments. In this case, the old adage “don’t put all your eggs in one basket” holds true. Apple Inc. (NASDAQ: AAPL) stock is up 2,700 percent over the past decade. However, due to bad timing and lack of diversification, Andy Zaky somehow managed to lose millions of dollars because of his risky options bets on Apple.
As any shareholder of BP plc (ADR) (NYSE: BP) back in 2010 after the oil spill might know, disaster can strike the best of companies. Even diversifying within a given sector, such as owning a basket of ExxonMobil Corporation, Chevron Corporation, ConocoPhillips, Royal Dutch Shell Plc (ADR) and BP, can be better than owning a single stock. However, by owning stocks in several different sectors and by diversifying outside of the stock market all together (bonds, gold, real estate, etc.), the risk of any single mistake completely wiping out your account is minimized.
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