- January 6, 2022
- Posted by: admin
- Category: Strategies
HOW TO ADDRESS RISK IN YOUR INVESTMENT PLAN: No matter how much we want to avoid investment risks, they are always there. Risks are a very critical part of any investment plan. The first step in mitigating them is acknowledging that they must occur, whether minimally or maximally. After accepting their existence, it becomes easier to identify them.
HOW TO ADDRESS RISK IN YOUR INVESTMENT PLAN
According to Mellody Hobson, the biggest risk is not taking one at all. There’s a fine line between risks and rewards, and if you keep shying away from risks, you reduce your chances of getting rewards. The general knowledge in the investment space is the higher the risk, the higher the profits; the lower the risks, the lower the profits. If you invest often, you will find out that it’s true. Hence, if you can manage the risks appropriately, you will find it easier to make higher profits.
Each investment venture has a certain level of risks that comes with it, be it stocks, cryptocurrency, bonds, or real estate. The best way to subvert the risks is to stop viewing risks as negativities and address them by managing them properly. Here are a few ways to manage the risks in your investment plan.
Identify your risk tolerance level.
Every trader, both experienced and novice traders, has a risk tolerance level for investment. Some traders are high-risk-takers while others are low-risk-takers. Before investing in any venture, ensure that you evaluate yourself to know the type of risk taker you are. Some parameters you can use to assess yourself include; your age, income, dependents, previous investment portfolio, and investment goals. By evaluating your risk tolerance using the parameters listed above, you can quickly determine the extent of risk you can take.
Identifying your risk tolerance level would reduce the occurrence of loss in your investment portfolio and safeguard your capital during market downturns.
Appropriate asset allocation
Asset allocation involves the investment of funds in more than one asset class to reduce investment risks and increase potential returns. Some asset classes you can try include; Equity, Debt, Mutual funds, Gold, Forex, Bonds, and real estate.
The most appropriate asset allocation strategy for most investors is investing in diverse asset classes. It’s like investing in both equity and gold. If gold underperforms, equity might overperform to yield profits.
Diversify your portfolio
After appropriate asset allocation, the next thing to do is to diversify our investment in the same asset classes. By so doing, we can further reduce overall investment risk. A typical example will be investing in cryptocurrency and investing in normal cryptocurrencies like bitcoin and NFTs at the same time. Usually, when the crypto market crashes, NFTs are likely to remain unshaken than the other cryptocurrencies.
The dollar-cost averaging is an investment strategy that helps reduce the effects of market fluctuations in your portfolio. All you have to do is allocate a specific dollar amount towards purchasing stocks, bonds, mutual funds, or other investment strategies. After allocation, you can go ahead to purchase more stocks or bonds when they are at their lowest prices and buy only a few when the prices are up. As time goes on, the average prices of those stocks become higher than the average cost of your stocks. This strategy is very systematic and will reduce the chances of risk in your investment plan.
Monitor your investments
Even after putting all the strategies mentioned above in place, managing risks will become problematic if you don’t monitor your investments regularly. The best way to monitor your assets is to watch your portfolio performance periodically and perform periodic reviews. This strategy is not only crucial for short-term investors, but it will also prove very useful to long-term investors. You can review your portfolio once or twice every three months to have a birds-eye view of things. Some investments are more volatile than others, hence determining the regularity of your portfolio reviews.
It is important to note that the above methods do not increase profits or reduce loss. However, if you can employ them as you create your investment plan, you reduce your chances of experiencing risks. Also, ask for advice from experienced investors and read articles that will boost your knowledge about investing, risks, and rewards. For more information on investment options, visit croft financial.