Understanding basic investment strategies may help you make more informed investing decisions. Asset allocation involves dividing your portfolio into different asset classes — typically, stocks, bonds, and cash— to seek the highest potential return based on your risk tolerance. This process can help you balance investments that have lower levels of risk with those that have a higher potential for growth. Diversification generally means “don’t put all your eggs in one basket.” Different types of investments may react to changing market conditions in different ways. When your money is diversified, gains in one area may help compensate for losses in another. By distributing your holdings among a variety of investments, you can help limit your risk of loss in any one sector of the market. Dollar-cost averaging involves investing a fixed amount of money at regular intervals, such as monthly. By investing the same amount consistently over time, you are able to buy more shares of an investment when the price is low and fewer shares when the price is high, whichmay result in a lower average cost per share over time. Because dollar-cost averaging involves making periodic investments, you should consider your financial ability and willingness to continue making purchases during periods of low and high price levels. These strategies may seemunexciting, but much of their value comes from reducing the potential to react emotionally during periods of market volatility. Asset allocation, diversification, and dollar-cost averaging won’t guarantee a profit or prevent a loss; they are methods used to help manage investment risk. Investments offering the potential for higher rates of return also involve a higher degree of risk of principal. The return and principal value of all investments fluctuate with changes inmarket conditions. Shares, when sold, and bonds redeemed prior to maturity may be worthmore or less than their original cost.
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