Smart Investment Strategies to Minimize Financial Risk

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Most people are afraid of financial investments, especially huge ones, because of the potential risk. As risk cannot be avoided entirely, there are some tried and tested tips to help you manage them.

Know your risk tolerance limit & consider trading

Before jumping on any investment, you should pre-define the maximum amount of capital you can afford to lose. Your risk tolerance could depend on your financial obligations and your age. If you are single and in your 20s, you are likely to have fewer financial responsibilities as opposed to if you are 40 years old, married, and with kids that you have to feed and educate. For this reason, you should start making investments earlier in life for a more financially secure future. You can look into investing in pure equity for more wealth creation, but it is not advisable if you are about to retire. After knowing your investment risk tolerance, look for the best risk-return value investments. If you do not have enough capital, there are companies offering funding for traders through pre-loaded live trading accounts through which you can trade and keep a share of the profits.

Maintain enough liquidity

As much as you are investing to secure your future, be aware that emergencies can occur at any time. You should seek an investment plan that allows you to redeem your investment anytime in case you need emergency funding, even if markets are down at the moment. Set and maintain liquidity in your portfolio by secluding an emergency fund that could last you 6 to 8 months. If you are a beginner in investment, consider low-risk options that give you smooth access to emergency funds such as Overnight Funds and Liquid Funds in your account.

Asset allocation

Consider investing in multiple asset classes and securities from different issuers to reduce your investment risk. You can invest in a mix of other asset classes such as real estate, debt, equity, gold, and mutual funds to get optimal results. Another approach to asset allocation is combining asset classes that are inversely proportional to each other, such that one of the two is performing well at any given time. For instance, equity and gold are inversely proportional, which means when equity is outperforming, gold is underperforming, and vice versa.

Diversify your investment portfolio

To reduce your investment risk even further, you can diversify your investment within the same asset class. Choose stocks from different sectors to reduce risk, but not too many sectors such that you cannot keep tabs on each one. Your portfolio should be diverse enough to ensure that no single factor can affect most stocks in your portfolio. For investment in mutual funds, you can invest in different schemes. For instance, if you are investing in real estate mutual funds, you can invest in five different mutual funds schemes.

Perform your due diligence

Doing your due diligence should be your priority before investing in anything because your finances are your sole responsibility. Always conduct thorough market research to have a glimpse of how the company might perform in the next few years. If you are investing in the long term, analyze how the company’s management is currently performing and its critical ratios like its price to earnings ratio and debt to equity ratio. Blindly following other people’s recommendations could increase your investment risk and cause losses.

Invest in blue-chip stocks

These are stocks of established companies that have already achieved financial stability and are reputable nationally. Such companies have steady growth, low volatility rates, and stable profitability even with economic challenges. Blue-chip stocks record good performance with stable price-to-earnings, interest coverage, and debt-to-equity ratios. Besides guaranteed stable earnings, blue-chip stocks regularly give a competitive edge, dividend payouts, financial base strength, and diversification.

Regularly monitor your portfolio

No matter how long-term your investment is, you have to keep checking it periodically to measure your portfolio’s performance. Some asset classes, such as equities, are susceptible to experiencing volatility once in a while, so it is advisable to conduct a portfolio review twice per year if your investment is long-term. However, this volatility is short-term and can be overlooked, but you need to watch out for poor performance if it goes on for a long time.

Conclusion

A smart investment strategy finds the balance between your risk and returns, and it aims to help you manage potential risk.