4 Investing Strategies to Reduce Risk

Financial advisers tell us that, in order to achieve our retirement saving goals, we ought to invest a portion of our retirement funds in equities. However, if you, like many people, view the stock market as more akin to a casino than a rational investment option, then investing in stocks may seem like a scary proposition.

While there is no way to eliminate the risk from the stock market, based on my experience as an equity analyst, there are steps that you can take to reduce the risk and, perhaps, to help your sleep better at night. Keep in mind that, in some cases, there is a tradeoff to reducing downside risk, because it also may limit your upside potential. Even so, if you are a nervous investor, consider these 4 investing strategies to reduce portfolio risk and generate income.

Seek income. Seeking dividend-paying stocks with attractive yields is no guarantee that your portfolio won't head south if the stock market drops, but the steady stream of income they produce can provide ongoing cash flow while you wait for the market and your stocks to rebound. Look for companies with a long history of paying dividends and, ideally, with a history of dividend increases each year. Also, select companies with sufficient cash flow to maintain dividend payments in the future.

Opt for low-beta stocks. Beta indicates how much a stock's price has fluctuated in the past relative to movements in the overall stock market. A stock with a beta of 1 historically has moved in tandem with changes in the stock market's value. A beta above 1 indicates a stock's price tends to move more than the market in either direction, and a beta below 1 indicates that a stock's price tends to move less than the market, either up or down. One way to reduce risk in a portfolio is to look for stocks with betas below 1. A stock's beta usually is easy to find, since many financial websites include beta in their statistical data on individual stock. Keep in mind that beta is determined by how a stock has acted in the past. While this may prove to be a good indicator of future performance, there is no certainly that it will.

Sell covered calls. Selling a covered call option against shares you already own provides income upfront and reduces your downside risk in the stock by the amount of money you receive for the call. One downside to selling a covered call option is that it limits your upside potential in the share price until the option expires. Also, if, for some reason, you want to sell the shares before the call expires, you will have to repurchase the call before you can sell the stock.

Diversify. One of the cardinal rules of conservative investing is not to put all or too many of your eggs in one basket. Therefore, no matter how enthusiastic you are about a particular stock or industry, limit your investment in it and diversify your portfolio by investing in the stocks of other companies and other industries.