Don't Put All Your Eggs in One Basket: 4 Ways to Reduce Investment Risk

If market volatility has taught us one thing, it’s that all investments carry some degree of risk. While it is impossible to avoid that risk entirely, there are ways to safeguard your capital. Here, we’ll list a few ways to protect the value of an investment.

Consider Investing in Pooled Funds

Investing in a unit trust, an open-ended investment company, or an investment trust will expose you to a diverse selection of companies that reduces overall risk. An experienced fund manager will make important decisions, which may steer an inexperienced investor in the right direction. In comparison, investing in shares takes skill, and it increases risk as it’s contingent upon the fortunes of one company rather than several.

Diversify Your Portfolio

As the title says, it’s important not to put all your eggs in one basket. Investing in a range of assets—such as fixed-interest bonds, equities, property, and cash—will provide much-needed diversification. This might reduce your risk, as high-performing assets work to offset those that aren’t doing so well. Though it may seem tough to build a diverse portfolio, it’s easy to do with today’s mutual funds.

Make a Long-Range Plan

Like other things in life, investing typically doesn’t bring instant results. Staying invested over a few years gives those investments a greater chance of returns, though there are no guarantees. Long-range investors find it easier to ignore short-term volatility and the opportunity zone deadline in favor of prolonged growth.

Become a Global Investor

Getting into global funds will further diversify your portfolio, allowing you to include stocks from economies around the world. If one area’s markets take a dip, other gains will offset those losses. It’s important to remember, though, that investments in emerging markets are volatile and aren’t as regulated as other options.

Invest Frequently

Regularly putting money into the market rather than investing a lump sum may bring higher average returns in the long term. In a phenomenon known as “pound cost averaging,” investments buy more when shares are low and less when they’re high in price. This strategy doesn’t always work, however, and some investors may end up with lower returns than if they’d invested their funds all at once.

Use Stop-Loss Orders

Some regular investors use stop-loss orders to shield themselves from sudden market drops. When these orders are implemented, shares are sold automatically when they hit a certain price. The stop-loss strategy protects profits and limits losses, but its use depends on an investor’s risk tolerance and preferences.

Perform Due Diligence

As with other large purchases, it’s important for investors to do their research before taking the plunge. Review an investment’s earnings growth, history, debt load, and management team, and compare its results with those of similar products. An investment’s P/E (price to earnings) ratio is another important figure to consider; it shows a comparison between the price of stock and its yearly net earnings. Companies with higher P/E ratios usually involve higher risks.

In Conclusion

Though the tips in this guide may help, they aren’t right for every situation. As an investor, it’s crucial to remember that, no matter which strategy you choose, you may not get back what you put in. If you’re investing for the first time, seek advice from an independent consultant.

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