Opportunity Risk

Opportunity Risk — When opportunity knocks, will you be there to answer?

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Opportunity Risk — When opportunity knocks, will you be there to answer?

Opportunity risk is one of the simplest of all the investment risks to understand. It’s about being able to take advantage of a good deal when it comes along. If you’ve committed all of your resources to one investment opportunity and a better one presents itself, you may have lost the opportunity to participate.

There are two primary ways investors experience opportunity risk. 

 

  • Investing too much money into too few investments — Putting all your eggs in one basket takes away the flexibility to move into better performing investments.
  • Investing too much money when market prices are high — Going “all in” at market highs can hurt investment returns for years.

In each case, the problem comes from committing too much money too quickly and leaving yourself with too few options.

Will you be ready to take advantage of a good deal when it comes along?

Be ready and stay flexible

There are a couple of ways you can keep more options on the table and lower your opportunity risk.

  • Research — Do your homework and review available information on a particular stock or mutual fund before investing.
  • Asset allocation — Spread your money across many different asset classes, including cash accounts. The two benefits are: you increase your opportunity of being invested in whichever asset class is performing at any given time, and you have some cash available for the next great investment opportunity. Keep in mind, asset allocation does not guarantee market gains or protect against market losses.
  • Consistent contributions — Investing on a regular basis, the way you do with payroll contributions to a 401(k), takes the guesswork out of when to invest. It will keep you from investing too much money when prices are up and give you the opportunity to buy when prices are down. This strategy is called dollar cost averaging. While dollar cost averaging is a powerful investment strategy, it does not guarantee market gains or protect against market losses.

Keep yourself poised to pounce

Life is full of opportunities. The key is to put yourself near the door so when opportunity knocks, you have the flexibility and the confidence to say, “I’ve been expecting you. Come right in.”

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