Emerging growth stocks can be among the riskiest of all since they are shares of fledgling companies still in their developing stages, with hopes of superior earnings growth over time. Some of these companies will make it, but others will fall by the wayside. Foreign stocks carry the additional risk of currency fluctuation. For example, if U.S. investors put money in European stocks and those currencies decline in relation to the dollar, the falling foreign currencies can reduce an investor's profits or add to losses. Investors attempting to go it alone run the risk of not doing their homework as thoroughly as professional analysts.
Many investors reduce risk by diversifying their assets.
Mutual funds themselves are a form of diversification since they invest in a broad variety of securities sometimes encompassing many different industries and types of stocks. However, investors building their own portfolios can also diversify by searching for stocks in different sectors, choosing among various types of stocks, and adding an international component to their holdings. Whichever path you choose, selecting stocks on your own or buying one or more stock funds, diversification helps reduce your exposure to a steep decline in a particular market. The best strategy for every investor is to have some assets in stocks all the time, rather than trying to time market swings. Not even professionals are consistently successful at predicting the direction of the overall market.