In pursuit of your goal to grow your wealth, factors like unfavourable economic events and political uncertainty can get in the way. These factors will make you lose your money and minimize the possibility of getting high returns from your investment.
However, the risk of loss should not discourage you from leveraging opportunities to generate income or create more wealth. You have a chance to mitigate the risk by using the right strategies to safeguard your capital.
Read on to learn how to mitigate risk in your investment.
Diversify Your Investment
You can reduce your investment risk by putting your money in various investment product types. For example, you can choose an asset allocation strategy to invest in bonds, stocks, saving accounts, and real estate. The idea is to invest in different asset classes to reduce your risk of relying on a single asset.
You can also diversify by investing in the assets of various companies. It will be less risky to buy the stocks of more than one company than to use all your capital to purchase the shares of a single company.
Building an investment portfolio will minimize exposure to all the risks in a single market. For example, an increase in one company’s returns may offset the decline of your investment in another firm. Diversifying means that you will always have another investment to lean on when one goes south.
You can also diversify by investing in alternatives such as hedge funds and pension funds. Choosing alternatives will benefit you by introducing you to new investment opportunities that you would not have had access to as an individual investor. The alternatives are a good option to avoid the low-interest rates and returns of conventional assets.
Have Clear Investment Goals
Laying down your financial goals will help you determine where to invest. The goals will drive your decision to invest in low-risk or high-risk assets.
If you need your money within a year, it will be better to invest in low-risk assets. This investment decision will ensure that you can get your money when needed.
However, if you have long-term financial goals, you can invest in a riskier investment. In most cases, these investments will yield a higher return for you. If the value of the investment declines, you can wait until the value increases again.
Financial advisors are likely to advise you to focus on long-term investments. If you follow their advice, your investment will have a greater chance of generating positive returns.
The financial goals you set will also depend on your risk tolerance. If you cannot manage a loss, focus on low-risk investments. As you become familiar with how the market works, you can make higher-risk investments that come with higher returns.
Keep Track of Your Investment
Once you complete the asset allocation step, continue monitoring your investments. Check your investments’ progress at least once a year to avoid missing any development.
Keeping tabs on the investment will help you catch the warning signs of declining returns. You will also see when there is an opportunity to make a profit from your investment.
Even though monitoring is necessary, you should avoid overdoing it. If you check your investments every week, you might be tempted to make unwise decisions. For example, you may sell your assets at a loss if their value falls suddenly.
Keep your financial goals in mind as you track the investment. Don’t shy away from adjusting your investment portfolio when you feel that an investment is not aligned with your financial goals.
Maintain Adequate Liquidity in Your Investment Portfolio
You can face financial emergencies at any time. In such cases, you may need to redeem your investment regardless of how the market is doing. You will reduce the risk of loss if your portfolio has liquid assets.
You will not sell your investment quickly if you have liquid assets. It will stay in the market and fetch you a good return in the long term, especially when the market conditions are favourable.
You can maintain liquidity by establishing an emergency fund to cover you in case of financial distress. It is also possible to improve the accessibility of your emergency funds by having low-risk investment options like overnight funds.
Avoid Scammers
Sometimes, avoiding scammers may be all it takes to reduce your investment risk.
The scammers will sound knowledgeable and may even have professional websites to make them look legit. You should always research whether the individual posing as an investment advisor has a license.
You should also check for red flags of an investment scam. A scammer may promise you huge returns and guarantee that there is no risk of loss when you invest with them. In some cases, they may mention that the offer is for a select few.
Before investing, always look for a legit company or a licensed investment advisor.
Perform a Background Check on the Company
In addition to avoiding scammers, always perform your due diligence before investing. Check how the company has been performing. Examine the profitability ratios to understand the ability of the company to generate profits.
Due diligence will ensure that you invest only in a company that will remain stable even in the future. Skipping the due diligence step will translate into blind investments and a high risk of loss.
Mitigate Risk and Enjoy High Returns From Your Investment
The risk of loss should not stop you from investing and building your future wealth. You can use some strategies to mitigate risk to minimize the possibility of losing all or a large percentage of your capital. Embracing these strategies will help find the balance between returns and losses.
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