Lower your risk

It can seem like investing in stocks is a crapshoot, as stocks can go up or down on any given day, but it doesn’t have to be so risky. Here are some ways to reduce your risk.

Invest for the long haul. Short-term investing is more like speculating or gambling. Being a shareholder means you’re a part-owner in a company, so commit yourself to those businesses and aim to stay invested in them as long as they remain healthy and growing. With a long investing period, you can ride out the occasional market downturns that will likely occur. Don’t worry about what happens this year if you don’t plan to sell for many years.

Learn more. The savvier you become about investing, the fewer mistakes you’ll likely make. Don’t buy stocks merely on tips from friends or strangers without even knowing what a company does. Instead, read widely and keep reading. Start with books by Peter Lynch, John Bogle, The Motley Fool — or the “Little Book” series of investing guides. Read Warren Buffett’s educational letters to shareholders at berkshirehathaway. com. Hang out at the Fool online (fool.com), reading and asking questions on our discussion boards.

Invest only in companies and industries you have studied and understand well. Weigh the risks that companies disclose in their financial statements. Consider a stock’s valuation. Assess the market capitalization, expected future earnings and price-to-sales and price-to-earnings ratios for candidates for your portfolio. Stocks that seem undervalued should offer less downside risk than exciting high-flying stocks.

Avoid penny stocks (those costing less than about $5 per share), commodities, futures, day trading, shorting and investing on margin. Those can be risky ways of investing.

Consider not investing in any or many individual stocks and just opting for a low-fee S&P 500 index fund. You’ll match the market’s returns effortlessly.

The stock market can be volatile, but over the long run, it’s one of the most effective ways to build wealth.