Many individual investors make the mistake of thinking that because they own mutual funds instead of stocks, they are shielded from risk. Mutual funds can be thought of as baskets that contain assets ranging from stocks and bonds to commodities and currencies. With this balanced mix, an investor can be protected against the ups and downs of a particular industry, but that shouldn't put them into a mood of complacency.
Putting money in a mutual fund may be useful for individuals who don't have the time and expertise to research and monitor the performance of various companies. Fund managers pay close attention to how assets are performing and will make slight adjustments as needed.
At its core, the job of a fund is to keep its shareholders invested in a mix of assets, regardless of the volatility of the stock market. As such, fund managers will not remove all of your stocks from a portfolio if the market drops precipitously.
To stay within your risk tolerance, it may be a better idea to depend on yourself rather than on a fund manager. Actively managing your portfolio means:
- Developing an exit strategy
- Diversifying your assets, considering small and large industries
- Keeping your portfolio a manageable size
- Having a basic knowledge about the industries that your investments are in
- Researching the long-term performance history of your stocks.
By its nature, the stock market is risky. Whether you stick exclusively with mutual funds, or are going at it on your own, volatility will always be present. By using SmartStops' investment analysis and portfolio management software, you can keep your risk to a minimum.
Categories: Risk Management, Trading & Portfolio Strategies