As a new investor, it is good to know that you will encounter risks all the time.The greatest risk I find a newbies in business and investment make often is the risk of not patenting their brand or name. This risk always comes back to bite you if you experience any semblance of success, so it should be avoided. Still, all risks cannot be avoided. Risks yield good results, but you will have to lose some of the money you invested to make some returns. It’s a gain-some-lose-some industry.
Although you can do nothing to hide from risks, there are steps you can take to minimize the risks in investment. These steps, when applied correctly will give you greater returns on your investment. But it is important to note that for these to work you need to practice them regularly.
1. Get Clear On Your Financial Goals And Determine Your Risk Tolerance Level
Before you jump into any investment opportunity you need to consider if you have the capacity to shoulder an investment. Start off by asking what your financial goal is. How much do you want to earn within 6 months or 1 year? Where would you like to channel the money or proceeds from your investment?
This will give you a specific figure to look forward to every time you invest. This will determine how often you invest within that period and how long you’re expected to wait before you reach that goal. It will also help you assess if what you want to invest in will help you meet your goal.
This is valuable information you’ll need when it comes to sieving out the several investment options you have. If you have 4 short term financial goals then it’s best to invest cash investments like treasury bills as they are easily redeemable.
However for long-term financial goals, investing in stock, real estate or bonds is more appropriate as their dividend is received over a longer period of time.
Once you have a financial goal set before you, the next step is to know your risk tolerance level. What determines your risk tolerance levels are your net worth (assets minus liabilities) and your risk capital. Your risk tolerance is high when both your net worth and risk capital are high and you’re allowed to go into bolder investments.
But if you have a low risk tolerance level (low net worth and risk capital) it’s best to play it really safe when it comes to investment.
2. Take Time To Do Some Research Before You Invest
Assuming you already know your investment capacity, you can start “shopping” for investment opportunities. But before investing in anything at all you need to do your homework. Conduct a background check on what you want to invest in and the people involved. Is all the paperwork in order? Check if the rewards of the investment are really worth the risk and if the turnaround time favors your plans.
Arming yourself with such information protects you from falling victim of fraud. It also saves you from losing your hard earned money.
3. Diversify Your Investment
When you’re trying to meet up with your financial goal it is wise not to put your eggs in one basket. Investing all or a considerable amount of money in one asset category or portfolio exposes your investment to greater risk.
Imagine if you invest 60% of your savings into only one asset category like stocks of XYZ Company. The probability of losing all your money is higher. This is because you have nothing in place to complement your investment.
However if you invested 20% in the stock of XYZ company, 20% in government bonds and another 20% in cash investment, you’re diversifying your investment. So where one investment fails, it will not lead to a loss of the others.
Diversification of your investments helps you reach your financial goals and stay reasonably safe.
4. Create An Emergency Fund
There will be times when your investments may not perform well, especially in long-term financial investments. You may urgently need some money but are unable to cash in on the money you invested. An emergency fund will help at these points.
If you suffer a loss because of changes in market forces or wrong decisions, the emergency fund will help cushion the effect. Plus if you need to draw on some funds you can always resort to your emergency fund.
Start off early by regularly keeping aside some money. Be diligent and try as much as possible to be consistent. You never know when you’ll need the funds.
5. Regularly Monitor Your Investments And Rebalance Where Necessary
The market changes constantly. To reduce risks it’s always good to keep an eye on the performance of your investments.
Rebalancing involves the buying and selling of assets with the main purpose of ensuring that your original investment portfolio is maintained.
What this simply means is that where one of your investments is not giving you high returns compared to the others, rebalancing requires you to sell some of the best performing investment and invest it into the one that is not performing so well so that the portfolio you started with stays intact.
Let’s say you planned your portfolio to be made of 70% bonds and 30% shares to meet your financial goals.
If after a year your current portfolio is 50% bonds and 50% shares, to rebalance your portfolio you’ll have to sell some of your shares and use the proceeds to buy more bonds to take the bonds back to the 70% mark and lower the shares back to 30%.
Let’s get to investing then!