We can’t completely avoid investment risk, but we can certainly reduce it by managing it effectively. Now you must be wondering how we should manage risk? We’re here to help you understand these terms and greater financial literacy!
When we seek success in our investments, managing risk doesn’t mean avoiding it entirely.
That’s why in this week’s blog we’re going to cover 7 Strategies to Reduce Investment Risks.
Understand Your Risk Tolerance
Risk Tolerance refers to an investor’s ability to withstand the risk of losing his capital, financial situation, that is, his invested capital. Risk tolerance depends mainly on the age of the investor and their current financial situation. For example, if you’re in your mid-20s, aren’t married, and have fewer financial responsibilities, you’re more risk-tolerant compared to other investors who are married in their late 50s and have kids going to college. As a general rule, younger investors are more tolerant of risk than older investors.
So, if we start investing early in life, we can begin our investment journey with a pure equity investment portfolio that focuses mainly on aggressive wealth creation.
However, it is worth noting that this strategy is not recommended for those who are about to retire and should focus on the preservation of wealth. By knowing what our risk tolerance is, we can determine investments based on the best risk-return value to manage our investment risk.
Keep Enough Liquidity in Your Portfolio
A financial emergency could come at any time! So, even when the markets are closed, we need to get our investments back at any time. This risk can be reduced if we maintain sufficient liquidity. If we have liquid assets in our portfolio, our current investments can provide optimum long-term returns and we can benefit from any periodic market correction.
Once we have determined our risk tolerance and set aside some money to ensure adequate liquidity in our portfolio, we need to understand that it is time to set an asset allocation strategy that works for us.
Asset Allocation Strategy
Asset Allocation refers to investing in multiple asset classes to reduce investment risks, and this strategy also gives us optimal returns.
One of the asset allocation strategies is to invest in a combination of asset classes that are inversely proportional to each other.
Diversify, Diversify, and Diversify
Once we have found our perfect mix of asset classes for our portfolio, we can further reduce overall investment risk by diversifying our investment in the same asset class. Portfolio diversification is required to minimize your losses from the sudden movements of the markets, rises and falls.
Instead of Timing the Market, Focus on Time in the Market
We should focus on staying in the market longer rather than buying fast by timing the market. Only then can we see the benefit of compounding. If we invest longer in the stock market, smaller corrections will not affect our portfolio and will reduce the overall investment risk.
Do Your Due Diligence
Always do your due diligence before making any investment, as you are responsible for your finances. For example, if you are buying a cryptocurrency for the purpose of a long-term investment, you should check how the management is performing, and there are certain key systems. It is necessary to get an idea of how it is by doing fundamental analysis. If we blindly invest in a cryptocurrency by listening to the advice of others, we may incur losses that will increase our investment risk.
Watch Regularly
After considering all the above factors, they should monitor their portfolio regularly. If you’re a long-term investor, that doesn’t mean you’ve invested and you’ll forget about your portfolio. You need to regularly monitor the performance of your portfolio and conduct periodic reviews. Doing the portfolio review frequently will give you an advantage.
