How you can mitigate the different types of risk in your portfolio
When you invest your money, you probably know you’re taking on a certain amount of financial risk. Unlike depositing money in a bank, where it is often insured and can earn a steady amount of interest, investing doesn’t offer financial certainties. You could earn a great deal of money on your investments, but you also face the risk of losing money.
In general, the more financial risk you’re willing to take on in an investment, the greater your chance of potentially earning higher returns. Higher financial risk will also increase the losses you might face on your investments. However, investors also face risks they don’t necessarily get to choose when they’re selecting investments. “Market risk” is one of those.
Defining market risk
Market risk refers to financial factors that can impact an overall economy. Market risk can affect the economy of just one country—such as the U.S.—or it can affect international economies, too. Whenever a geographic area faces a widespread recession, governmental change, natural disaster or other major factors, that area’s financial markets will usually reflect the impact.
Generally, some amount of market risk is inevitable with every investment. Even the most experienced investors can’t completely eliminate market risk. However, smart investors may be able to soften their potential financial losses during a down market by diversifying their portfolios and using what are called market risk “hedging strategies.”
First, though, it’s important to understand the typical market risks all investors face.
The 4 most common market risks
When it comes to market risk, you’ll likely hear about these primary factors:
Strategies for reducing market risk
There’s no way you as an investor can completely eliminate exposure to overall market risk. However, there are things you can do to help your portfolio weather any big market moves.
One way is to diversify your investments. Consider putting money into different asset classes (such as equities, bonds, commodities, real assets). Within equities, you can try investing in different industry sectors (such as technology, health care and energy).
You can also diversify by investing in index mutual funds and exchange-traded funds (ETFs) that invest in thousands of different types of companies.
With so many factors to consider, a Financial Advisor can help you sort through the options to develop a diversified investment strategy that reflects your individual risk tolerance and broader financial goals.
The bottom line: The more you understand the basics of market risk, the better you can prepare your investments to face it.
Robin M. Hamilton, Senior Vice President I Financial Advisor Senior Portfolio Manager I Family Wealth Advisor
Morgan Stanley Wealth Management
Article by Morgan Stanley and provided courtesy of Robin Hamilton.
Robin M. Hamilton is a Senior Vice President I Financial Advisor Senior Portfolio Manager I Family Wealth Advisor in Morgan Stanley Wealth Management at Morgan Stanley Smith Barney LLC (“Morgan Stanley”). She can be reached by email at email@example.com or by telephone at 239-449-7863.
This article has been prepared for informational purposes only. The information and data in the article has been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Robin M. Hamilton may only transact business, follow-up with individualized responses, or render personalized investment advice for compensation, in states where she is registered or excluded or exempted from registration, https://advisor.morganstanley.com/the-naples-group
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