But along the way, there are a few basic rules of investing that can help protect your portfolio from investment risks:
Education: Take the time to learn what you don't know. Ask lots of questions, and never walk away unclear. If you don't fully understand, you will probably put off making a decision. The only way to combat risk is to make informed decisions and take action.
Diversification: Spread out the money
you invest among various types of asset classes and holdings. This strategy
helps offset temporary losses of some securities because, in a well-diversified
portfolio, it is likely that something is performing well.
Equities: To
combat inflation risk, you'll need to invest in growth-oriented securities.
That means stocks, which have historically outperformed every other type of
investment. Just how large a portion you should invest in equities is best
determined by your investment goals, time horizon, and tolerance for market
risk.
Tax Deferral: This is a bona fide weapon
against risks like inflation and living too long. By investing in a tax-deferred
vehicle, you avoid paying capital gains taxes each year and that allows your
investment to grow faster over time. Of course, you will eventually have to
pay taxes when you withdraw the money. You can also benefit from not paying
taxes by buying and holding stocks. You only incur capital gains taxes when
you sell.
Stagger Investments and Withdrawals: To
protect yourself against poor timing at either the front end or the back end
of the investment cycle, put money in or take money out gradually. Regular,
gradual investing provides you with the lower cost opportunities of dollar
cost averaging. At the other end, staggered redemptions allow you to cash
out strategically, starting with investments that are at all-time highs while
avoiding those going through temporary price drops, giving them more time
to recover.
