In the realm of investing, risk is an accepted fact. There are no investments that give you the potential to earn high returns without the risk of losing some of your money. As in life, to get a reward, you have to take some risk. That said, there are a number of strategies you can use to manage investment risk.
Investing in mutual funds may help to manage your risk
If you invest in the stock of one company or one bond issue, you are assuming that this one security will consistently do well. This is quite risky. Mutual funds, on the other hand, invest in many — sometimes hundreds — of securities. This diversification increases the chance that your investment will perform more evenly. That’s because typically — over any given time period — some securities will perform well and others will not. When you own many securities, the advances realized by some may work to offset the losses incurred by others.
Neither asset allocation nor diversification guarantee a profit or protect against a loss. They are methods used to help manage investment risk.
Investing with a goal and time frame in mind
Mutual funds have different goals, so match your goal with the fund’s goal. For example, the goal of a money market fund is generally to preserve the value of your investment. Therefore, if you are looking for an investment that will grow over 10 years, a money market fund may not be the right choice.
Practice asset allocation
Investments can be grouped into three general asset classes: money market securities, bonds and stocks. Each asset class has its own traits and may respond differently to the same economic or world events. Within the bonds and stocks classes, there are sub-asset class levels, each of which has its own distinct traits. By spreading your money across different types of assets, you dilute the impact any single position would have on your portfolio’s overall performance.
Neither asset allocation nor diversification guarantee a profit or protect against a loss. They are methods used to help manage investment risk.
| Your Time Frame | Investment Types and Their Traits | Homestead Funds |
|---|---|---|
| Short-term: Less than one year | Money markets: Generally carry lower risk but typically also give you a lower reward | • Daily Income Fund |
| Medium-term: Less than five years | Bonds: Generally carry more risk than money market investments but, in turn, may deliver a higher reward and are typically characterized by less volatility than stocks | • Short-Term Government Securities Fund • Short-Term Bond Fund • Intermediate Bond Fund |
| Long-term: Five or more years | Stocks: Generally carry higher risk but over long periods have delivered a higher reward | • Stock Index Fund • Value Fund • Growth Fund • International Equity Fund • Small-Company Stock Fund |
As a money market fund, the Daily Income Fund has limited potential for income production. You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor is not required to reimburse the Fund for losses, and you should not expect that the sponsor will provide financial support to the Fund at any time, including during periods of market stress.
Review your allocation regularly
It’s good to review your account when you receive statements or yearly to see if any changes need to be made. However, for your own peace of mind, you probably don’t want to monitor it daily.
Let’s say you chose an allocation in line with your goals and invested your account as follows: 80% in the ABC Stock Fund and 20% in the XYZ Bond Fund. After a year in which stocks were performing well, your allocation in the Stock Fund has grown to represent 85% of your account, and the Bond Fund has dropped to 15%. To restore your account to the original 80%/20% percent investment mix, ask your fund company to help you rebalance your account. Homestead Funds offers an automatic rebalancing feature and does not charge any transaction fees to rebalance, but investors should consider the possible tax consequences.
In addition, if your needs change, you will want to review your investment allocation to determine if changes are needed.
For large amounts, consider making your move in steps
If you have a large sum you want to invest, it may make sense to do it gradually. Likewise, if you are considering closing your account, you may want to sell shares gradually. You don’t want to be the victim of buying all of your shares at a high price or liquidating your account at what turns out to be a low price. A disciplined buy or sell strategy can help you avoid such a scenario. This can also spread out any taxes that may be due if share redemptions take place over multiple years.
Homestead Funds offers automatic investing and redemption programs that allow you to set up periodic purchases or withdrawals. The programs may be especially appropriate for a lump-sum inheritance or if you’re ready to start tapping a retirement account to meet your monthly cash flow needs. Automatic investing does not ensure a gain or protect against a loss in a declining market; it is a method used to help manage investment risk.
Are you ready to diversify your account at Homestead Funds?
Whether you want to change your asset allocation, open a new account, set up automatic rebalancing or set up an automatic investing program, we’re here to help!
Debt securities are subject to various risks, including, among others, interest rate risk, credit risk, extension risk, income risk, issuer risk and market risk. The value of U.S. Government securities can decrease due to, among other reasons, changes in interest rates or changes to the financial condition or credit rating of the U.S. Government. Investments in asset-backed and mortgage-backed securities are also subject to prepayment risk, as well as increased susceptibility to adverse economic developments. High-yield, lower-rated, securities involve greater risk than higher-rated securities.
Equity securities generally have greater price volatility than fixed-income securities. The market price of equity securities may go up or down, sometimes rapidly or unpredictably. Equity securities may decline in value due to a number of factors including those relating to the issuer or equity securities markets generally, among others.
The Stock Index Fund pursues its objective by investing substantially all of its assets in another pooled investment vehicle ( “Master Fund”). The Master Fund’s investment objective is to match, as closely as possible, the performance of Standard & Poor’s 500 Stock Index. Accordingly, the ability of the Stock Index Fund to meet its investment objective is directly related to the ability of the master fund to meet its investment objective. Index funds may hold securities of companies that present risks that an investment adviser actively managing individual securities might otherwise seek to avoid and also are subject to tracking error risk.
Value stocks are subject to the risk that returns on stocks within this style category will trail returns of stocks representing other styles or the market overall over any period of time and may shift in and out of favor with investors generally, sometimes rapidly, depending on changes in market, economic, and other factors. Investments in value securities may be subject to risks, among others, that (1) the issuer’s potential business prospects will not be realized; (2) their potential values will not be recognized by the market; and (3) they will not perform as anticipated.
Growth stocks are subject to the risk, among others, that returns on stocks within this style category will trail returns of stocks representing other styles or the market overall over any period of time and may shift in and out of favor with investors generally, sometimes rapidly, depending on changes in market, economic, and other factors. Growth stocks can be volatile. These companies typically invest a higher portion of their earnings in their businesses and therefore may not offer the level of dividends provided by a number of value stocks, which may have the potential to cushion stock prices in a falling market. Also, earnings disappointments can lead to sharply falling prices because investors frequently buy growth stocks in anticipation of superior earnings growth.
Foreign securities are subject to political, regulatory, and economic risks not generally present in domestic investments and may experience more extreme changes in value than securities of U.S. companies. Investing in emerging and frontier markets may be subject to greater political and economic instability, less developed securities markets, and different and enhanced risks from those in more developed markets.
As a general matter, securities of small and medium-sized companies tend to be riskier than those of larger companies. Compared to large companies, small and medium-sized companies may face greater business risks because, among other factors, they may lack the management depth or experience, financial resources, product diversification or competitive strengths of larger companies, and they may be more adversely affected by prevailing economic conditions. There also may be less publicly available information about smaller companies than larger companies. In addition, these companies may have been recently organized and may have little or no operational or performance track record.
Diversification does not ensure a profit or protect against loss. It is a method used to help manage investment risk.
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