Saturday, July 12, 2014

Nothing Ventured, Nothing Gained

Risk is a part of investing. But, you can control your amount of risk. If you are afraid of taking chances you can still invest, but don't count on a good return on your money. A certificate of deposit or a government treasury bill would be safe, but don't look to get rich off of those. Diversification will help to control your risk. Mutual funds or exchange traded funds are diversified since they are composed of many stocks bundled into one investment vehicle. Consider the Vanguard Total Stock Market ETF (VTI). The year to date total return on this is 7.00%. The 52 week range is between $84 and $103. It is currently at $101 per share. It contains large, mid, small and micro cap stocks. So this is an index fund that offers you a way to invest while controlling risk.

More risk can lead to more potential reward. Buy individual stocks to increase risk and potential return. But, don't put all of your eggs in one basket. Let's say you have $1000 to invest. Is it better to put 100% of your money into one individual stock, or better to split it up five ways and put 20% into different stocks, all in different sectors? It depends on your risk tolerance and also your investing time horizon. You might want to put $200 into a tech stock, $200 into an auto stock, $200 into a health care stock, and the like. Young people and those with more disposable income can afford to risk more and lose more.

Jeremy Siegel is a professor at the University of Pennsylvania's Wharton School of Finance, the premier business school in the US. In his book, "Stocks for the Long Run", he writes about how investing in the stock market over a long period of time is a proven way to build wealth.

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