How to Manage Risk and Diversify Your Portfolio

Investing refers to the process of creating financial assets by buying and/or selling securities that can gain interest and possibly return a profit over a period of time (called an investment). To invest is actually to put money into an investment with the hope of either a future gain/profit in return or a current benefit/cash outlay for the current investment. Simply put, to invest simply means to put capital into an investment with the hope of gaining interest or an ongoing gain in value over a certain period of time through the investment. Investments range from common stock investments (such as the stocks on the New York Stock Exchange or NASDAQ) to more complex investment strategies such as foreign currency trading. It is through these more complex investments that the wealthy individual draws his benefits and therefore, the ability to control his wealth in a one-to-one way.


There are several ways to invest in order to reap the maximum profits possible. The simplest way to invest in order to obtain the maximum return would be to simply buy low and sell high. However, this is not always practical or achievable. For example, let’s assume that you are interested in purchasing shares in a foreign company (let’s assume for the moment that the foreign company is United States-based). Every year, the company earns dividends which are paid out to its shareholders.

These dividends are then invested in various stocks and bonds in order to earn an interest rate that is slightly higher than what the company currently receives. If you were able to invest in these stocks and bonds, then, theoretically, you could receive a return on your initial investment of $1.00 per share. Of course, if you cannot manage your investments personally, then you will want to consult a qualified and experienced financial professional such as a Certified Public Accountant (CPA) who will be able to help guide you through the investing process in a manner that is both feasible and safe for you and your portfolio.

In addition to the main categories of stocks and bonds, there are also several sub-categories within these main categories. For example, mutual funds are an investment that allows many investors to purchase common investment instruments, like the stocks and bonds, from one large pool. This is one of the safest forms of investing. With a mutual fund, there is usually a minimum investment that an investor must make, but even with this minimum, there are still many ways that you can diversify and protect your portfolio.

Another safe yet potentially lucrative way of investing is by utilizing what is called a tax-deferred account. Tax deferred investments grow in value, and are not taxable until distribution of capital gains. In order to qualify as a tax deferred investment, one would need to have regular income from work, and also dividends from stock ownership. By maximizing the use of tax deferral, real estate investors are able to realize capital gains at a higher rate than most other people.

There are also different methods that you can utilize in order to diversify your portfolio. Some of these methods include insurance, mutual funds, bonds, money market accounts, CDs, certificates of deposit (CDs), and more. The type of diversification that you do will depend on your risk tolerance, capital investment size, investing goals, and financial expectations. If you are interested in learning more about how you can effectively manage risk and diversify your portfolio, it is a great idea to speak to a qualified financial planner or stockbroker today.