How to Minimize Your Investment Risk
There are savings and then there are investments — two entirely different animals, for two kinds of wealth building. With savings, your money is insured, but grows slowly and almost always below the rate of inflation. Thus, you are actually losing money if your return is below the rate of inflation.
With investments, your money is not insured and can grow much more rapidly and may outstrip the inflation rate. Building savings is typically chosen for liquid and short-term goals. Investing is for reaching longer term goals such as for college education or retirement.
When investing, you assume at least some risk that your funds will take a hit or possibly be lost. There are some ways that you can reduce your risk and still come out ahead.
Pour all your investments into high-yield accounts and you increase the chances that you’ll lose money. If you diversify your investments by spreading these funds across multiple asset classes such as cash, stocks and bonds, you can reduce your exposure. For instance, when the stock market is getting hammered, the interest rate on your cash accounts may be higher. When the stock market is humming, your money accounts will pay out less. Your portfolio should contain a balance of investments to spread out your risk.
Within your portfolio you may have a variety of bonds to choose from. Within this category, you can choose various maturity dates to reinvest regularly as these come due. This is known as “laddering” or what Raymond James describes as balancing and blending shorter term investments, such as bonds, with longer term investments, such as securities. With this method you spread out your risk and improve your returns.
Every serious investor keeps a sharp watch on the stock market. Since bottoming out in 2009, the stock market has recovered and is now in record territory. Some analysts are expecting a major correction; others see the market rising further.
You can buy stocks, but you may also want to consider investing in mutual funds. Mutual funds consist of many stocks and are favored by investors that prefer to spread out their investments among several companies. The risk here is that there is no guaranteed rate of return and the value of any mutual fund can depreciate. When shopping for a fund, you need to assess your tolerance for risk and choose a fund that mirrors the level of risk that you are willing to assume.
When seeking to invest, you’ll most likely work with a professional such as a fund manager. Expect to be charged shareholder fees or annual operating fees, perhaps both. These fees can erode your profits, therefore choose a professional and a fee plan carefully. There are also different fund choices available including growth or income funds, the latter also known as small cap funds.
Investors are prone to get spooked when the market suddenly changes or other conditions, such as political change, occurs. Those investors that demonstrate much patience are more likely to ride out a storm and give their investments time to grow. Others may attempt to avoid a potential loss by selling or reducing their investment when conditions suddenly change. If you can wait out the market changes and keep your eye fixed on your long-range goals, you’re more likely see your investment grow than the person who invests for the short-term.
Our tips are no substitute for professional advice. Know what you’re getting yourself into when investing your hard-earned monies, carefully placing your money in investments that are right for you.