Diversification of risk is essential. The basic concept is to hedge more risky investments such as futures or options with more conservative investments such as Treasury bills or other cash investments. Ultimately, hedging risk is dependent upon how much time the investor wants to keep money tied up, and the level of risk the investor finds tolerable.

Managed Funds

These are the best forms of risk management. Managed funds are broader based than mutual funds, yet share the same basic idea: money managers pool investments together over many different kinds of investments, both moderate and high-risk. The investor pays a fee for the manager, but this sort of expert handling itself helps reduce risk.

Active Funds

These kind of funds are the most risk-adverse, since the money manager is constantly shifting money from place to place, constantly keeping a balance between moderate and high-risk investments. Such a fund will constantly be seeking the highest rate of return over a specified time by constantly shifting money to higher performing investments, while still maintaining a risk-adverse balance. This is contrasted to passive funds where a money manager keeps the money for a longer period of time over the same group of balanced investments. Its main benefit is that it is easier for the investor to track and serves more stable results.

Investments Over Time

It is not only asset classes that are able to diversify, but the kinds of classes one will invest in will be influenced by how long the money is to be tied up. The longer the investment time, the more risk the investor can afford. Short-term investments should be very conservative, but, for the sake of maximizing return, should mixed with a few volatile stocks and options. Long-term investments do not need the level of diversity that short-term investments do, on the theory that over time, fluctuations in the market will compensate over time, leading, ultimately, to a steady but small return.

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Basics of Managed Funds

Diversification