Tips On How To Lower Investment Risk
If you are interested in investing and lowering your risk while doing so, then there are three main strategies that can help.
Historically, whenever people invest, they usually get good returns over time. Now, whenever the markets fluctuate, as they will, it can be very challenging to avoid reacting to these fluctuations and make rash financial decisions when it comes to your investment portfolio. It is important to note that persons who make quick and emotional financial decisions usually buy when the market is experiencing a high and then sell when it is low. People who do this usually have a much more difficult time achieving financial success.
Now, you may be wondering, how can you prevent yourself from making these errors. Well, here Barclay Simpson share these tips. You should think about different investment strategies which will help to lower risk when it comes to investing while ensuring that you make good returns as the years go by. Some of the investment strategies you should consider include:
– Dollar cost averaging
– Asset allocation
– Diversifying your portfolio
Asset allocation is exactly what it sounds like, the way that you determine how much you invest in particular investments within your portfolio so that you can meet your goals. Some of the asset classes that you’ll invest in include:
– Alternative investments
Now, if you want to grow your investments and you’re fine with taking on a certain amount of market risk, then you may choose to invest 80% of your money into stocks and 20% in bonds. It is very important to take your time to determine how best you want to divide your assets within your investment portfolio. You should also consider your time frame as well as the rewards and inherent risks of every asset class.
Basically, the various asset classes will have different levels of risk and returns. To put this into perspective, government T-bills provide a guaranteed level of interest and principal which is not the case with corporate bonds and stocks. Also, the money market funds that invest in government T-bills don’t offer guaranteed interest or principal. You also need to remember that past performance does that guarantee what will happen in the future. So, asset allocation will not 100% guarantee that you will be able to turn a profit.
Diversifying Your Portfolio
Next, diversifying your portfolio goes quite well with asset allocation.
Diversifying your portfolio is about getting a wide range of investments in every asset class. This is important since it lowers your investment risk. It also helps to reduce the negative impact of drastic changes in the market on your range of investments.
Diversifying your portfolio and lowering investment risks
So, if you only invested in one type of stock of one particular company, this would be highly risky since you would be dependent solely on how that company performs in order for your investment to grow. This is a single security risk. It is high risk since your investment can fluctuate a lot since the price of that holding can vary a lot.
However, if you invest in 15 – 20 different company stocks across various industries, then this will greatly lower your investment risk and the chances that you’ll suffer a big loss. Even if you have one investment that is going through a loss, you have a high chance that other investments will rise which will balance your portfolio.
With that said, this doesn’t remove risk, it just helps protect you against complete loss of your investments.
Dollar Cost Averaging
This strategy helps to reduce the negative effects of market fluctuations since it is a disciplined approach to investment.
It is where you use a particular amount of money to buy bonds, stocks, mutual funds etc regularly. Therefore, it allows you to buy more shares when they are less expensive and fewer shares when the prices increase. As a result of this, the price of the shares that you purchased will be higher than how much you paid for them. This is a highly systematized approach that removes the emotional part of making investments which naturally lowers risk.