Investing your money is a great way to stay ahead of inflation and grow your wealth over time. Unfortunately, investments also carry investment risk. No matter how you invest, or in what way, there is always the chance you will lose your money or see the value of your investment plummet.
However, there are some ways in which you can minimize this risk and reduce your likelihood of experiencing a major loss. You can never eliminate risk, but reducing it is something everyone should try to do when they can.
With that in mind, this blog post is going to go over a few great ways to reduce your investment risk when investing your hard-earned money.
Diversify Your Portfolio
The first thing to do when looking to reduce risk is to diversify your portfolio. You can invest in a wide range of different ways from an index fund, to real estate, to a bond, to stocks and many others. The more places you are invested in, the less volatile your overall investment is. If you only invest in one stock, the risk is very high, as if it tanks you will lose a lot of money.
In addition to investing in multiple different areas, you should also think about your asset allocation. This is how much of your portfolio is in different areas. Those with a bit more comfortability with risk might have more in stocks than bonds, but an individual looking for the lowest risk may have more bonds than stocks.
Diversification and asset allocation often go together, so utilizing them both is a great way to protect yourself, while still seeing returns and growing your wealth.
Do Your Research and Watch for Scams
Another way to be a little safer when investing is to do your research. Before investing in a company or fund, be sure to look them up. You need to look at the company themselves, their finances, what they have been in the news for, and also the historic performance of the investment. This can allow for an educated decision to be made.
In addition to researching your investments and really thinking about them, you also need to watch out for common investment scams. These include Ponzi schemes, pyramid schemes and dozens of others. Scammers have gotten better and better over the years, so many scams today can look incredibly legitimate, so always be careful.
Don’t Follow the Herd or Invest Emotionally
Another way to reduce your risk is to always invest intelligently, and not emotionally. Emotional investing can lead to rash decisions and making investments that you will eventually regret. Be sure to learn how to avoid emotional investing to give yourself the best chance of investing success. If you invest purely out of greed, fear, anger, or excitement, you might not be thinking clearly.
A common problem many investors (both new and old) have is that they follow the herd. If everyone is investing in something, this alone can lead someone to doing the same, even if they don’t understand or believe in it.
This, along with a fear of missing out, can lead people into making poor choices that have the potential to decimate their finances. Do your own research, make your own choices, and if you decide to listen to others, do it at your own risk and don’t rely solely on their thoughts to make your investments for you.
Minimizing Risk While Investing
No matter what you invest in, there is always some inherent risk that you need to be okay with. But by minimizing this risk, you can give yourself the peace of mind that you won’t lose everything on one bad bet.