5 ways to reduce investment risk
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This beginner friendly guide walks you through time-tested strategies to reduce risk while investing. We offer a simple step-by-step guide on how to reduce your investment risk and let you know the best brokers to use. Continue scrolling to learn more.
Reduce your investment risk: a step-by-step guide
There are many strategies or methods to use if you want to reduce your investment risk. Below we’ve highlighted some of the best ways to reduce risk in our easy to follow step by step guide.
1. Decide on your risk tolerance
Risk tolerance is an investor’s ability to withstand a decline in value of their investment. Every investor’s appetite for risk will be different, although it largely depends on age and financial situation. Younger investors with few financial obligations will have a higher risk tolerance than older investors who may have children.
With all investing there is inevitably some risk and you need to decide how much to accept. All investments will fluctuate in value and it’s likely your portfolio will be in the red at times. However, setting a budget ahead of time can help stop any temptation to throw good money after bad. Knowing your risk tolerance can help with managing an investment strategy.
2. Invest for the long term
One of the best ways to reduce risk is to think long term and be prepared to keep your money invested for years. Instead of trying to make quick money by timing the market, it’s often a better approach to focus on a longer time in the market. This way, smaller corrections won’t affect your portfolio.
Longer term investing also allows you to use a strategy known as dollar-cost-averaging, whereby you invest the same amount at fixed intervals of time. By using DCA you do not need to worry about picking the perfect time to buy a stock. Most investments require time to pay off and having a long term approach is a top way to reduce your overall risk.
3. Diversify your portfolio
Diversification is key for not only long term success but also a top way to reduce your investment risk. Putting all your eggs in one basket is not only risky, but rarely works out and spreading your money around is a much safer way to invest. Diversification means allocating portions of your portfolio to different investments.
Not every company or industry you invest in will perform well all the time. By investing in lots of different ones you will be able to reduce the risk of your portfolio suffering volatile periods. Investing in different companies, industries, asset classes, and geographies are some ways to diversify your portfolio while reducing your overall investment risk.
4. Monitor your investments regularly
If you’re investing for the long term, checking your portfolio daily is probably unnecessary. However monitoring your investments regularly is a good way to keep track of how your money is performing. There are lots of things that can affect your investments and staying up to date with the latest developments can help you make the right decisions.
Reading company annual reports is a good way to understand how a business is doing from a financial point of view. Keeping tabs on news related to a sector you’re invested in is helpful to find new investment opportunities. Having a good understanding of the latest news and developments can help you make informed decisions on when to buy or sell.
5. Set stop-losses
A stop-loss is an order placed with your broker to automatically sell an investment at a certain price. They are an excellent way to protect against dramatic or unexpected falls. Using stop-losses can give your investments somewhat of a safety net and are best used in accordance with your risk tolerance.
It’s common for markets to fluctuate and volatile periods are to be expected. Thats why its key to place a stop-loss with enough leeway to prevent your investment from being automatically sold during short term falls. Stop-losses not only give peace of mind, but are one of the best ways to reduce your investment risk.
Best places to invest
To start investing you’ll first need to register with an online broker. In the table below, you’ll find some of the top rated platforms around. They all let you invest in a range of different assets and track their performance. Simply click the links to get started.
A quick recap
There are lots of ways to reduce your investment risk and we’ve discussed five of the top ones on this page. Above all, a well diversified portfolio and a long term approach are two of the most important ways you can reduce your risk while investing. Additionally understanding your risk appetite can help you make the most of your investments.
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