Risk is a natural, necessary part of investing. In fact, the greatest risk to financial success may be taking no risk at all. That’s why smart investors don’t eliminate risk, they seek to manage it.
Here are some investing strategies that may be able to potentially manage risk.
- Asset allocation apportions a mix of stocks, bonds and cash equivalent investments that reflects the best balance of risk and reward for your individual situation. Many financial experts agree that the way you allocate your money among these three asset classes—rather than how good you are at choosing individual securities—can have the biggest impact on your long-term returns and the volatility of your overall portfolio.1 The percentage of your money you place in each class depends, to a large degree, on what your objective is, how much risk you’re willing to take and how much time you have.
Traditional asset allocation models consisted of 60% domestic equities and 40% high grade bonds. However, OppenheimerFunds believes asset allocation must evolve. Our Global Multi-Asset Group looks at the changing macroeconomic, valuation and risk environments throughout the world to find unique ideas and opportunities across asset classes. Work with your financial advisor to build an asset allocation strategy that can help you pursue the goal of a financially secure retirement.
- Diversification helps to spread risk by investing in a variety of securities— not just across the three major categories, but within each group as well. Why invest in several kinds of stocks … or bonds? Even investments in the same asset class have different patterns of risk and return. And because they do, the poor performance of one can often be offset by the good or stable performance of others. Small company stocks are one example. When their prices are headed down, those of large company stocks might be on the rise. By owning both types of stocks, you are better able to balance your losses with gains, which in turn tends to reduce your portfolio’s total risk.2
- Dollar cost averaging is simply the process of investing a specific amount of money in the same security at regular intervals. In doing so, you acquire more shares when prices are down and fewer when prices are up. Though dollar cost averaging doesn’t guarantee you’ll make a profit—or avoid a loss—it generally lowers your average cost per share while reducing your chances of investing too much at a market peak.3
Past performance does not guarantee future results. This chart is shown for illustrative purposes only and is not intended to represent the performance of any Oppenheimer fund. Systematic investment plans, such as dollar cost averaging, do not assure a profit and do not protect against loss in declining markets. Before investing, investors should evaluate their long-term financial ability to participate in such a plan.
1Source of data: Original study: “Determinants of Portfolio Performance II: An Update,” Financial Analysts Journal, May-June 1991, G. Brinson, B. Singer, G. Beebower; “Does Asset Allocation Policy Explain 40%, 90% or 100% of Performance?,” Financial Analysts Journal, January-February 2000, R. Ibbotson, P. Kaplan.
2Diversification does not guarantee a profit or protect against loss.
3Since dollar cost averaging involves continuous investments regardless of price levels of fund shares, investors should consider their financial ability to continue purchases through periods of low price levels. Systematic investment plans do not guarantee profit or protect against losses in declining markets.
OppenheimerFunds does not recommend any specific asset allocations. A financial advisor can suggest an asset allocation strategy designed to meet your financial goals, time horizon and risk tolerance. Asset Allocation cannot eliminate the risk of fluctuating prices and uncertain returns and does not assure a profit or protect against loss. Systematic investing plans, such as dollar cost averaging (DCA), do not assure profit and do not protect against loss in declining markets. Before investing, investors should evaluate their long-term financial ability to participate in such plans. Diversification does not guarantee profit or protect against loss.
Investments in mutual funds are subject to market risk and volatility. Shares my gain or lose value. Fixed income investing entails credit and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and geopolitical risks. Small-sized company stock is typically more volatile than that of larger, more established businesses, as these stocks tend to be more sensitive to changes in earnings expectations and tend to have lower trading volumes than large-cap securities, creating potential for more erratic price movements. It may take a substantial period of time to realize a gain on an investment in a small-sized company, if any gain is realized at all. Diversification does not guarantee profit or protect against loss.