However, there are various strategies that can be employed in reducing the level of risk you take when investing.
To be successful in your investments, learning to embrace risk but doing it efficiently is core and our main focus in this post is to guide you on how to go about this.
Here is a list of 5 Strategies to help you reduce investment risks.
1. Identify your risk tolerance capacity.
2. Diversify your investment.
3. Monitor your investments regularly.
4. Ensure the liquidity in your portfolio is sufficient.
5. Use the Asset Allocation Strategy.
Let’s discuss them in detail.
1. Identifying your Risk Tolerance Capacity
A general rule states that younger investors are more risk tolerant than older investors due to some factors that we won’t exactly cover for the sake of the scope of this post.However, what this rule is simply saying is, due to the financial obligations and age of the young investor compared to the old investor, the ability for the young investor to be more risk tolerant is higher.
This said, investing early in life will require that you channel your investment portfolio towards wealth creation while for the older generation, it would be a portfolio channeled towards preserving wealth but nonetheless, knowing what your risk tolerance capacity is will help you figure out what investment is best with high-return value.
2. Diversifying your Investment
This strategy requires that you do not “put all your eggs in one basket” but what you want to do is; figure out how to fix your investments in class of assets that are the same so as to help you reduce the risk involved.An example will be investing in Equity Mutual Funds but doing so in a variety of the same class, say large, middle or small-cap equity mutual funds so that when there is a crash in the market, because you portfolio is diversified, the overall investment risk is reduced.
3. Monitoring your Investments Regularly
Monitoring your portfolio even as a long-term investor is necessary to help you keep watch on your performance and also doing periodic reviews is a good way to keep track on your investments.It is recommended to do portfolio reviews once in six months because of short-term volatility asset classes like equity but as a long-term investor, you can overlook this and only change when there has been a long period of continuous poor performance.
4. Ensuring the Liquidity in your Portfolio is Sufficient
Having liquid assets in your portfolio can ensure that existing investments will deliver long-term returns that you can benefit from.Having an emergency fund in your portfolio that can help redeem your investments when the markets are down can help you reduce risk and avoid running up and down in such situations. Risks can be reduced once you maintain adequate liquidity.
5. Using Asset Allocation Strategy
Asset Allocation means investing in more than one asset class for reducing the investment risks that provides you with optimal returns. Though there are several asset allocation strategies, one is to invest in a combination of asset classes that are inversely correlated to each other.
An example is when an asset class is outperforming and the other asset class underperforms such as Equity and Gold. Equity and Gold are inversely correlated to each other, so when equity outperforms, gold underperforms.
This strategy can reduce investment risk and provide optimum returns if used effectively.
There are other strategies that can help you reduce your investment risks but we thought that these were core and can be easily understood so that you can navigate seamlessly through risk management for optimal returns and avoid mistakes.
Which of these strategies would you need help implementing?
Original Post: Elearnmarkets
https://www.elearnmarkets.com/blog/8-strategies-to-reduce-investment-risks/