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It's amazing how often the concept of risk is completely overlooked by investors They hear a good story or get a hot tip and never ask "What could go wrong?” Risk is often held to be a function of reward. 1he more risk you take, the bigger your hypothetical reward might be. In recent times that ratio has not always held, and investors who purchased bonds and safer stocks have often done bette than the high risk-takers. Common sense tells us that things will come back into alignment. If risky stocks don’t deliver rewards, their prices will drop more, while the price of so-called safety stocks will rise until they're overvalued. The result might be a situation where stocks that are wld ely perceived as Qfe are anything but. it would not be the ?rst time investors got bamboozled by a1 inability to value stocks realistically. With the future murkier than usual, you need ways to ensure you are managing risk intelligently. Here are some ways to do that: 1) Always assess expected rewards against risk. The ideal investment is one with a low degree of risk and high potential reward. Company share prices tend to follow eamings, and eamings are less predictable than you might think. But when a company holds assets that aren’t re?ected in its share price or the market overreacts to minor bad news, you can attain the much coveted “margin of safety" reconmended by Ben Graham and other investing experts. Don't rely solely on beta to measure risk. The beta is a measure ofvolatility. The number is widely available on ?nancial data sites. The higher the beta, the more volatile the stod<'s share price. High beta stocks are generally considered riskier. When a high beta stock is purchased at the bottom of its price range, however, it may be Qfer than many lower beta stocks. Look at compmy debt, cash on hand, retum on equity and free cash ?ow in addition to beta. Nevertheless, if wide price swings give you ulcers, you may prefer low beta stocks. 2) Diversify your stodc holdings Stock diversi?cation allows you to hold riskier issues without actually taking on more risk, by buying those issuesin different sectors. A portfolio with 10 stocks in energy, consumer staples, consumer discretionary, basic materials and healthcare is safer than one with two or three stocks in the Qme industry. The riskier your ?ocks, the more you need diversi?cation. 3) Diversify across asset classes. No matter how certain you are that stocks are a good value, you need other assets to protect you during major drops Bonds, real estate, and predous metals may perform in opposition to the market, smoothing out the bumps and allowing you to avoid the kind of panic that causes investors to dump all their shares at exactly the wrong time. visit: www.profitmirror.com for Best Stock Market Tips
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