What are some basic guidelines for investing?

Some of us don’t have a problem taking big risks. Others prefer to err on the side of caution. The reality is, there’s some degree of risk in most things we do. That applies as much to investing as anything else you do. No investment is completely without risk, but here are three time-proven ways to help deal with it:

Time – Investing is something you do for the long-term, and risk may be partly reduced by the mere passage of time. While past performance doesn’t guarantee future results, history shows that the impact of short-term market losses diminish over longer investment timeframes. In fact, collectively, the stock market has historically recovered from its losses.

Asset Allocation – The goal of this simple strategy is to help balance risk and reward by dividing your money between the asset classes. So, if interest rates rise and cause the value of your bond allocation to fall, there may be an increase in the stock portion of your portfolio. Your particular mix should take into account:

- How comfortable you are with risk
- Your goals
- How long before you’ll need the money

And while asset allocation can be a useful tool to help manage risk, it won't ensure profit or guarantee against loss.

Take our Risk Tolerance Quiz to find an allocation that might be right for you.

Dollar Cost Averaging1 – This is a strategy of investing a fixed amount of money in a particular investment at regular intervals. By doing so, you avoid trying to “time the market.” Since you’re investing a fixed amount, your money buys more shares when prices are low and fewer shares when prices are high. Here’s an example:

Nick – Lump Sum Investor

Nick bought $600 worth of shares at one time. His price per share was $20, and he got 30 shares.

Month

Amount Invested

Price Per Share

Shares Purchased

1

$600

$20

30

Total amount invested = $600

Total number of shares purchased = 30

Average cost per share = $20


Stephanie – Dollar Cost Averaging Investor

Stephanie used dollar cost averaging and purchased $100 worth of shares in her portfolio each month. For six months, the share price fluctuated from $25 to $10, with an average price of $17.50. Because Stephanie used dollar cost averaging, her average per-share cost was $25.38, and she has 8 more shares than Nick.

Month

Amount Invested

Price Per Share

Shares Purchased

1

$100

$20

5

2

$100

$25

4

3

$100

$10

10

4

$100

$20

5

5

$100

$10

10

6

$100

$25

4

Total amount invested  = $600

Total number of shares purchased = 38

Average cost per share = $15.78

These are hypothetical examples for illustrative purposes and do not represent the results of any particular investment in any portfolio. Your investment results will differ. Any investment involves risk, including the possible loss of the principal amount invested.