Investments help to maintain the value of your savings. Keeping all your finances in a bank account might be the safer option, but ultimately it means that you lose money, as inflation takes its toll on the economy. As such, everybody should try their hand at investing. It does not have to be on a large scale, either. Whatever you feel comfortable with or confident in works best. The nature of investments does mean, however, that they are fraught with risk. There is never any guarantee that you will see results for your financial gamble (though we all like to think we are the lucky kind of person who strikes gold). But saying this, there are certain techniques that stakeholders employ to reduce the risk of losing money when investing. If you are just starting to dip your toes into investments and want to learn more about the tricks of the trade, then this is the article for you. Here are X different strategies that can help you to reduce risk when investing.
1.) Small-Stakes Experimentation
This is a tip for beginners. To reduce risk, you need to gain first-hand experience of the stock market. You can do all the reading in the world and still only gain a theoretical understanding. To have a realistic grasp of investing, you need to actually venture into the world and do it. That’s why we suggest experimenting first, rather than diving straight in. Making a couple of low-stakes investments means that you can learn more about the marketplace without it having a detrimental impact on your wallet. Having this first-hand experience before getting into serious investments is a huge benefit, helping you to make more calculated decisions, thereby reducing risk.
2.) Learn About Investment Theory
Investment theory is the body of knowledge that stakeholders use to mitigate risk when investing. It is certainly worth doing the reading yourself. Though experience is essential, having solid evidence to back up your investment-related decisions should make a big difference, too. There are plenty of academic books that you can pick up and thousands of consultants who you can discuss things with. Experienced stakeholders also tend to share their advice online, which is immensely helpful for beginners. For example, you could learn more about what a 3 Fund Portfolio is or discover how to effectively allocate your assets. Learning the tricks of the trade through investment theory will most definitely help you to avoid making mistakes.
3.) Conduct Market Research
By now, you should know about investment theory and have a handful of experience. Now, let’s discuss some serious business. If you want to become a proper investor who does not rely on investment service providers, then you need to embark on your own independent ventures. You might be thinking about investing in a tech start-up or private healthcare provider. Whatever it might be, you need to conduct some thorough market research. This will really help you to avoid making any mistakes or uninformed decisions. Businesses want investors and so they will sell their product or service in the very most appealing light. It is your job to uncover the real picture. As such, it is crucial to conduct market research. Investigate whether there is genuinely a gap in the market for this product. Look up competitors and see if they have the same ‘unique’ selling point. You should also study how things are looking for the specific industry you are thinking about investing in. Do experts predict there will be a decline or rise in demand? For example, the luxury goods industry is currently suffering as a result of the coronavirus pandemic. Meanwhile, healthcare and artificial intelligence are prospering. As a rule of thumb, it is best to invest in emerging industries – ones that have the power to change the world but are still on the rise, allowing you to buy in for a smaller share price. Of course, it can be difficult to anticipate what industries are promising, hence the need for market research. With this knowledge backing you up, you are much less likely to take a misstep with your investments.
4.) Portfolio Diversification
Whenever you look up ‘risk management in investments’, you are bound to come across the phrase portfolio diversification. But what exactly is that? Why is it so important? Well, your investment portfolio essentially encompasses all of your financial assets; stocks, shares, properties, bonds. All successful stakeholders have a diverse portfolio, which means they have bought into a wide variety of businesses. If one of your investments has a poor performance, then your other investments can help to offset any loss in profit. Meanwhile, your finances generally stay in line with inflation. Portfolio diversification is incredibly important to risk management – especially for people who are less interested in making money, and more interested in maintaining the value of their assets.
5.) Asset Allocation
Portfolio diversification and asset allocation might sound like the same thing, but there is a difference between the two. While portfolio diversification is about investing in multiple industries, asset allocation is about expanding upon your current assets. For example, if all your assets are in shares, then you could do with investing in a property or some stocks. Financial assets all have different advantages and disadvantages. For example, stocks are incredibly high risk, but can also yield incredibly high rewards. Meanwhile, you can receive fixed investment returns from bonds, making them a safe option. However, bonds can be difficult to liquify, and they can be subject to interest rate risk. By having assets across the board, you can offset the disadvantages of each. As a result, you can mitigate the risk of suffering a big financial loss from your investments. Once again, make sure to research and learn about every type of asset in-depth before investing in anything.
These are some of the best strategies to reduce risk when investing as a beginner. Though nothing can be guaranteed with investments, these techniques should help you make a better-informed decision.