While there’s no sure-fire way to ensure your investments don’t plummet, a carefully implemented investing strategy can reduce the possibility of this happening and safeguard your capital if it does.
Here we’ll go over several steps you can take to minimise risk when investing.
Determine Your Risk Tolerance
All investments involve some level of risk. As a result, you must identify your tolerance to risk. The two main factors to consider here are your net worth and risk capital. Simply put, your net worth is the monetary value of all your assets minus any debts. Your risk capital is the amount of money you can lose on investments without impacting your lifestyle.
You must be honest about what you can afford to risk based on these factors. In particular, if your net worth and risk capital are low, then you should probably only consider conservative, low-risk investments if you invest at all.
Use Your Due Diligence
Using your due diligence means doing your research. Before you invest in anything, you should thoroughly understand what you are investing in and what returns and behaviour you can expect from these investments. Things to look for include an investments history, earnings growth, debt load, and P/E ratio.
Once you’ve found this information, be sure to browse around and compare it with data from other similar investments. While you can’t predict the future, you can make an educated guess by studying the trends and data.
Diversify Your Portfolio
Spreading your investments across various products can limit your potential losses. For example, let’s say you invest 25% of your money in stocks A, B, and C, 25% in real estate, 25% in insurance, and 25% in fixed deposits. Now let’s say stock A goes down; stocks B & C might still make up the windfall on your stock market investments. Let’s now say that the whole stock market goes down; it still won’t be game over for you since you have assets elsewhere.
Though it may reduce your potential profits in one area, a diverse profile will offer some level of security if one part of your investment strategy fails. For this reason, it’s also worth considering investing in different regions and markets. However, be wary of over-diversifying if you don’t have the funds for an extensive portfolio.
Maintain Liquid Assets
It would be best if you always aimed to have at least three months’ worth of liquid assets available to cover your expenses, preferably more. Having large swathes of money trapped in products with high volatility can leave you in an unfortunate spot if you need that money when that asset is experiencing a downturn.
Liquid assets can serve as a buffer when circumstances change for you, allowing your high volatility investments to do what they need to do over the long term.
Focus on Long-Term Goals
Some inexperienced investors get panicked over short-term volatility, an issue that is only compounded by how easy it is to check in on investments 24/7 online in today’s digital world. So while it is a good idea to see how assets are doing once or twice a year, it’s vital to concentrate on long-term goals. After all, your aim shouldn’t be to try and “beat the market” here.
Staying invested for 5+ years gives your assets a greater chance to create positive returns. Of course, that’s not a guarantee that they will, but try to avoid knee-jerk reactions.
No matter what investing strategy you take, you could always end up with less than you put in. If you’re unsure about investing, seek financial advice from a professional.