Should I Minimize Risk in Portfolio Management?

Jim B.
Jim B.
An effective way to minimize risk in portfolio management is through diversification.
An effective way to minimize risk in portfolio management is through diversification.

Some degree of risk in portfolio management is generally unavoidable, since every form of investment has some inherent risk, even if it is an extremely small amount. Investors should do their best to avoid this risk by diversifying the securities within their portfolios. In addition, they should do as much research as possible on potential investment opportunities to further minimize the risk in portfolio management. An investor should also find the level of acceptable risk he is willing to endure so that he can take advantage of profitable opportunities when they come his way.

People can be lured by the promise of hitting it big with an investment, whether it's a hot stock or a surefire business opportunity. But the reality of investing is that there are generally as many people losing their capital as there are those who are gaining it. Risk is a part of investing and it always will be, but there are ways for investors to lessen the risk in portfolio management while still taking some worthwhile chances on big profits.

Perhaps the most effective way for an investor to minimize risk in portfolio management is through diversification. This can mean choosing different types of securities, like an investor who picks some stocks, some bonds, some commodities, and so on. It can also mean picking different types of one security, like a few penny stocks and a few blue chip stocks, or amassing stocks from several different industries. The basic concept — that one or more under-performing securities can't do much damage to a well-rounded portfolio — is always the same no matter the technique used for diversifying.

Investors that do their homework can also effectively cut down on risk in portfolio management. This can mean studying financial reports about the companies that offer stocks, or perhaps learning about possible trends within the market as a whole. If an individual investor can't do this on his own, he can easily hire an investment professional with the experience and expertise to choose safe investments for him.

While it's important to try and lessen the risk in portfolio management, it might not be the best idea for an investor to try and eliminate it completely. Some securities are risky but compensate by offering high potential profits, and investors looking for substantial growth from their investment capital shouldn't ignore these assets. Instead, investors must consider their individual investment goals and decide how much risk they are willing to incur.

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    • An effective way to minimize risk in portfolio management is through diversification.
      An effective way to minimize risk in portfolio management is through diversification.