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Assess the risk you’re comfortable with

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Think back over your investing career. You may not be a star money manager, but you’ve already made some investing decisions. For instance, leaving your excess money in a bank savings or checking account is a decision — it may indicate that you fear volatile investments.

How would you deal with an investment that dropped 10 to 50 percent in a year, or even in just a few months? Some of the more aggressive mutual funds and exchange-traded funds that specialize in volatile securities like growth stocks, small company stocks, emerging market stocks, and long-term and low-quality bonds can quickly fall. While 50 percent declines usually take longer than one year to play out, that doesn’t make the lost value any less painful! The worst thing you can do when stocks suffer a major decline is to bail out and then miss out on the inevitable rebound so it’s crucial to buy stocks and hold them for the long run.

You can invest in the riskier types of securities by selecting well-diversified mutual funds that mix a dash of aggressive securities with a healthy helping of more stable investments. For example, you can purchase an international fund that invests the bulk of its money in companies of varying sizes in established economies and that has a small portion invested in riskier, emerging economies. That would be safer than investing the same chunk in a fund that invests solely in small companies that are just in emerging countries.

Mutual Funds For Dummies

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