Portfolio Risks and Returns - Risk-Reduction Strategies for Stocks


Given the risks outlined above, an IA can take advantage of the following risk-reduction strategies to help protect his or her clients' portfolios:

  • Diversification - diversification was discussed in section 13 as a way to include different types of investments within an asset class. Here, diversification refers to investing in a sufficient number of different issues to minimize systematic (market) risk.

  • Dollar-cost averaging - this strategy calls for a fixed dollar amount to be invested in the shares of a stock or mutual fund on a periodic basis (typically, monthly or quarterly). Therefore, the investor receives more shares when the security price is lower and fewer shares when the security price is higher. Assuming share prices fluctuate during the investment period, the end result is a lower overall cost per share over time compared to the average market price at the time of the purchases.

  • Income reinvestment - interest and dividends from stocks, as well as all types of mutual funds, may end up sitting in a money market account earning very low interest until an amount accumulates that is sufficiently large to be invested.

  • A better strategy is to set up automatic income reinvestment programs, such as:
    • Mutual fund reinvestment - when investing in mutual funds, you can set dividends and/or capital gains to be automatically reinvested in additional shares.

    • Dividend reinvestment plans (DRIPS) - some companies offer shareholders a plan to automatically reinvest dividends into additional shares of stock without paying brokerage commissions.


Look Out!
Be prepared for a question about dollar-cost averaging that may ask about the benefits to investors or calculate cost per share compared to average purchase price.

Measuring Portfolio Returns
Related Articles
  1. Personal Finance

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  2. Investing Basics

    Brokers and RIAs: One and the Same?

    Brokers and registered investment advisors have some key differences. Here's what you need to know.
  3. Professionals

    Understanding Series 6

    Upon successful completion of the Series 6, an individual will have the qualifications needed to sell open end mutual funds and variable annuities
  4. Professionals

    Top Strategies on How to Become a Stock Broker

    Gunning to be a stock broker and want an edge? Here's some veteran advice.
  5. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  6. Professionals

    Understanding Series 63

    Series 63 is a securities license that entitles the holder to sell securities in a particular state.
  7. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  8. Insurance

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace this test.
  9. Retirement

    6 Proven Tips For Series 6 Success

    These techniques can help you pass this test without the added stress.
  10. Insurance

    Tips For Passing The Series 6 Exam

    Find out what you can do during the test to make sure you get a passing score.
RELATED TERMS
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Series 79

    A examination to ensure a candidate is qualified to become a ...
  3. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  4. Series 34

    An exam required for individuals seeking to engage in off-exchange ...
  5. Financial Advisor

    One who provides financial advice or guidance to customers for ...
  6. Series 23

    An exam offered by the Financial Industry Regulatory Authority ...
RELATED FAQS
  1. If I have only a limited amount of time to study for the Series 6, what should I ...

    The Series 6 Investment Company and Variable Contracts Products Representative Qualification Examination is administered ... Read Full Answer >>
  2. What role does the 'chip cycle' play in the electronics sector?

    There are several highly acclaimed private Series 6 Exam courses in the United States. Many can be completed online. Popular ... Read Full Answer >>
  3. What does passing the Series 6 enable me to do?

    The Series 6, or the Investment Company Products/Variable Contracts Limited Representative, exam is administered by the Financial ... Read Full Answer >>
  4. What are the differences between the Series 6 exam and the Series 7 exam?

    The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>
  5. Do I have to successfully complete the Series 7 exam before I can register for the ...

    There are no prerequisites to register for the Series 63 exam. However, once you have registered for the exam, you must schedule ... Read Full Answer >>
  6. I completed the Series 6, do I have to complete the entire Series 7?

    After having written the Series 6 examination, there would be significant overlap with the Series 7 in areas such as mutual ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!