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I've always been told investing is risky. How do I lower financial risk while still investing in the stock market?

I want to start investing while I'm still in school, but I don't know how safe it is to do so. I know I can't eliminate risk entirely, but how can I better ensure success? I want to get some experience with investing so I can have that when I start trying to get a job someday. That's why I want to get started now. finance financial-services investment-management investing stock-market

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Eric J.’s Answer

Great question...

You are right in that you can never eliminate risk. Regardless of what you invest in, even if it is cash, there is risk. As an adivsor, my job is to add in risk, for the hope of return, to the extent we need to, in order to achieve our clients goals. We do that building a portfolio of stocks, bonds, and cash. Then, inside each of those, we diversify further. For example, in stocks we will use; large cap, mid cap, small cap, international, real estate...etc. In bonds, we'll use; long term, intermediate, short, ultra short, government, mortgages, corporates..etc... With each additional asset class you add into a portfolio, you are diversifying the risk.

Too much diversification can also be a risk, as it can make the portfolio ineffective at catching returns, because you are too spread out.

We try to think of our accounts as a fishing net...we want it wide enough to catch returns, but also deep enough to hold a lot of fish. If we make it really wide, by using a ton of asset classes, but not adding depth to them, the fish just fall out of the net. So we want a portfolio wide, and deep.

Best of luck to you...and I hope this answered your question!

All my best,

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Manuela’s Answer

Two years after I came in the US, on my way back from my first driving alone trip to New York, I got away alive from a head-on collision at 55MPH on the beltway with the orange barrels filled with sand and placed for protection at dangerous spots. I went online and I found out about the tunnel effect on the highway -a fundamental parameter of awareness that is NOT included in the brochure the departments of motor vehicles hand out for future drivers, or even in the driving schools' curriculum. I asked myself, where do "they" teach the most? I paid at the community college for the classes taken by future driving instructors.
My advice for you is to pay for the series 7 textbook and take it slowly or fast, depending on your background.
You will get the big picture. The robo-advisers come with give and take.

The professions that require a license and even more, errors and omissions/malpractice insurance coverage, involve a degree of danger and potential harm to the clients/patients the professionals serve. The financial industry is the second most regulated in the US - after the nuclear one. In the nuclear industry, the danger is done by micro particles out of control because the humans who take care of them made an error or did not follow a procedure. In the financial industry, the harm is done by the human greed, the asymmetric informational balance involved, and the unwillingness of the lesser informed to get more informed - to the best of its abilities.

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Yilun’s Answer

I think it's a great idea to get started early. I bought my first stocks when I was in high school. Everyone has a different risk profile and learning about risk is one of the best financial decisions you can make. It's very hard not to lose money when you start out as an investor because you are competing with people with much more experience than you. You can take a passive diversified approach, but you will not learn as much. If you take an active approach, you will likely lose money but you will also learn more. Risk is a two way street; if you avoid it you will never be successful but if you embrace it and make sacrifices at the beginning, you will learn and become more successful. When I was in high school, I lost several thousand dollars on a risky trade that made me very upset. Today, I've built up a large enough portfolio that losing several thousand on a trade doesn't worry me.

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Philip’s Answer

There are many different types of risks that investors need to consider. The most successful investors educate themselves on the different types so that they understand the risks that they face. Some types of risk can largely be diversified away, but others are part of the market. As part of diversification, learning to properly size positions and their related risks is an important skill for investors to develop as well. Finally, taking the time to understand your own personal risk tolerances is very important too. You may develop the best investment strategy of all time but it will be of little value if you panic sell when the market moves against you and miss the rebound.

If you are looking to learn more before putting real money to work many of the brokerage firms offer practice accounts that will let you use their systems and gain an understand the markets.
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Aaron’s Answer

You are very smart to be thinking about investing at a young age, because the sooner you start the more time you have to accumulate returns on your investment.

Mutual funds are a great way to get started, essentially a mutual fund is a basket of diverse stocks and investments that you can buy shares in. So instead of buying a bunch of shares of stocks in diverse companies yourself, you purchase shares in a mutual fund that gives you access to a more diverse portfolio of stocks than you would have been able to buy on your own. There are many different kinds of funds, some are conservative, some are more aggressive, some invest in tech only for example.

Hope this helps!