When exchange traded funds (ETFs) and other assets in the markets perform an impressive nosedive, investors tend to question their portfolios and investment strategies. But there is a way to still generate yields while reducing risk in the long run.
People shouldn’t give too much credence to spur-of-the-moment, reactionary investment ideas after a major market downturn, writes Steve Butler for Mercury News. Most people based losses on wealth reported back in 2007, an arguably artificial high.
Americans also hold a large amount of wealth in retirement mutual funds that are regularly increased by each paycheck. Dollar cost averaging with a steady flow of new money at a fixed dollar amount tends to benefit from temporary market lows because funds are purchased at cheaper share prices.
According Princeton professor Burton Malkiel, people can still see high yields with reduced risks. Malkiel advises investors to diversify into other asset classes like foreign stocks, emerging markets and real estate REITs in addition to U.S. stocks. It is estimated that diversification reduces stock risk by around 70%.
By holding 40% of a portfolio in bonds, the remaining stock-based risk can be further reduced by 38%. Higher returns can result if investors diversify beyond the broad market average.