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The Best Strategies to Help Reduce Investment Risk
Risk management doesn’t necessarily eliminate it but putting some measures into place can help you to reduce risk and minimize losses to earn good returns in your investment portfolios.
When you are seeking to invest in investment asset classes like equity, mutual funds, commodity, funds, and real estate, you need to embrace appropriate risk management strategies in a bid to reduce risk and minimize losses in your investment portfolio. We have compiled a good list of ways to reduce risk in your investment portfolio to equip you with top financial literacy for your long-term financial goal of building wealth.
Here are strategies to reduce investment risk
Do Your Due Diligence
You need to do as much as you can to do your due diligence by exercising utmost caution while venturing into risky investments because of the risks involved.
Before deciding to invest in a stock, ensure to study its price movement and how well the company offering it is doing, financially. You also need to consider if the stock is competitive within its sector. Do a thorough review of the financial details and the stock price movements of the company.
In a bid to do your due diligence ensure to consult with financial experts for guidance and reliable advice.
Go With Marketing Timing
Timing is everything when it comes to investing which makes it ideal to buy stocks when their prices are high and to sell when they are high. This will help to reduce investment risk and minimize the loss that might arise from overpriced stocks that won’t yield good returns in the long term.
Also, you can use a fixed monthly fund for equity investments to cushion against the effects of volatility and fluctuations.
Understand Your Risk Tolerance
Risk tolerance can be measured by several factors which are based on age and some experiences.
For example, a young investor can be more tolerant of risk because he doesn’t have many financial obligations to cater to at the moment. On the other hand, an older investor who has huge responsibilities like healthcare, children’s education, and welfare to cater to, might need to consider not taking an aggressive risk.
So the risk appetite of an older investor should be low and he should focus more on preserving his wealth to take care of his immediate needs as he is retiring.
Allocate Your Assets
When you allocate your investment asset classes, it helps to reduce risk and minimize a loss on your investment portfolios. Allocation of your assets can be based on the risk and reward ratio that the financial market instruments like equity, funds, and debt have to offer.
Equity, for instance, has the highest level of risk in trading short-term owing to its day-to-day market volatility. Despite this downside, it also gives the highest return in the long run.
Bonds are part of the options to allocate your assets because they are less severe to short-term price movements. Their returns are lower and prone to be depleted by inflation and interest rate risk which can affect price factors.
Diversify Your Portfolio
Diversifying your investment asset classes lets you limit the exposure of your portfolio to certain investments within your asset classes that are vulnerable to risks.
So to reduce investment risks with the portfolio diversification method, don’t leave all your investments in one company or sector. Rather, you should spread your investment in large, mid, and small-cap stocks with a focus on stable and high-growth sectors.
Your mutual funds’ portfolio can also be diversified across several investment schemes with some market capitalization criteria, investment plan, sector, and risk appetite.
Go With The Trend
When investing, it is so easy to get carried away with trends that are based on daily news and events. That is why it is very imperative to go along with the market trend when making investment decisions.
In some cases, a market rally is not sustainable and sufficient to determine a market correction that provides the rationality of an overvalued stock price. So to avoid getting stuck with overpriced stock, don’t jump in to buy stocks based on events that may look bargaining for.
Monitor Your Investment
In a bid to reduce investment risk, you need to monitor your portfolio periodically. Ensure to track its performance and review it from time to time. This will let you keep an eye on it to make sure it is going along with your financial goals
You will also be able to determine a poor-performer one and sell it off on time before it escalates losses out of control.
Monitoring your investment can guide you to re-balance with further investment diversification to allocate your assets to better-performing ones.
In as much as it is a good practice to monitor your investment, do not carry out this practice often as this could induce you to be emotional towards your price positions from events in the market which can lead to making wrong decisions.
READ ALSO: Ways To Reduce Investment Risk
Frequently Asked Questions on the Factors That Reduce Investment Risk
How can a business reduce financial risk?
Here is how a business can reduce financial risk:
- Identify the risks.
- Accept the risk.
- Take measures to mitigate the risk.
- Evaluate the cash-flow process.
- Review your financial management.
What are the 5 stages of risk management?
- The 5 stages of risk management:
- Identify potential risks.
- Evaluate the severity of the risk.
- Analyze the available solutions.
- Choose the solution to mitigate the risk.
- Review the results.
How can a business manage risk?
Ways a business can manage risk:
- Prioritize activities
- Buy into business Insurance
- Reduce Liability
- Embrace a Quality Assurance Process
- Reducing High-Risk Customers
- Growth Measure and Control
- Create a Risk Management Team
How can you reduce the systematic risk of a portfolio?
You can reduce the systematic risk of a portfolio by ensuring your portfolios include several asset classes such as equity, funds, fixed income, and property. In the event of a major systematic change, each will react differently.
How can market risk be reduced?
Here is how market risk can be reduced:
- Diversify your portfolio.
- Monitor and rebalance your portfolio to mitigate interest rate risk.
- Mitigate your portfolio against currency risk.
- Invest for the long-term to adjust for volatility times.
How do you manage investment risk?
You can manage investment risk by diversifying your investment portfolio of different asset classes, allocating your investment capital to different asset classes based on your risk appetite, and implementing dollar-cost averaging to eliminate the risk of wrongly timing the market.
How can a person reduce investment risk?
Here is how a person can reduce investment risk:
- Do your due diligence
- Allocate your assets
- Diversify your investment portfolio.
- Choose your investment goals.
- Monitor your investments
What are investment risks?
Investment risks are the potential occurrence of losses of expected returns relative to any specific investment. This occurrence can be a measure of the level of uncertainty to achieve the investor’s expected goal of investment returns.
What are the 4 main risks of investing?
The 4 main risks of investing:
- Company or sector risk
- Volatility risk
- Market risk
- Interest rate
- Liquidity risk
What are the 5 types of investment strategies?
The types of investment strategies:
- Indexing
- Dividend Investing
- Passive Investing Strategies
- Short-Term Investing
- Long-Term Investing
- Value Investing
- Income Investing
Final Note
Investing in investment asset classes carries a degree of risk that can result in the loss of your investment portfolio. So do ensure to consult with a professional for advice on the right investment suitable for your risk appetite.
Hope you got value from this article on the factors that can reduce investment risk. You can leave a comment in the comment section below to share your opinion.
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