More than 43 percent of the American population invests their money in stocks, bonds, and other assets. And while each person is different and the types of investments they select won’t be the same, they all share one thing: investment risk.
No matter what you’re investing in, there will always be a certain degree of risk involved. But that doesn’t mean you have to sit back and accept it. In fact, it’s far better to be proactive.
Here are a few simple ways to protect your portfolio from that risk so you can focus on growing your wealth rather than worrying about catastrophic losses.
1. Don’t Put Your Eggs in One Basket
All investments carry some degree of risk. But they don’t all have the same levels of risk.
Higher risk investments let you earn higher returns. But lower risk investments help you protect your money and reduce the risk of you losing everything if the market takes a downturn.
That’s why it’s important to invest in different stocks, bonds, and assets. Doing so lets you distribute your funds in different risk levels. If one category crashes, you won’t lose everything because you’ve distributed your wealth across different asset types.
2. Look for the Up-and-Coming Companies
It’s tempting to ride the wave of success when you see it. But try to find companies that are just getting started on that upward turn.
When you invest in companies that are growing in a sustainable way, you’re setting yourself up for financial returns for years to come. Even better, you’re getting in when the values of their shares are low.
This means you’ll get a higher return while paying less, freeing up more money to invest in other companies and industries.
Start with Companies You Believe In
If you’re not sure where to start looking for up-and-coming companies, follow your passion. Look for companies in industries you know or find brands you believe in.
You’ll help them continue to grow with each dollar you invest. And you’ll have the added benefit of supporting something you truly care about.
Continue this process as long as you invest. Remember, investing in new companies rather than relying on the same old established brands will help you increase your returns.
3. Invest Only a Small Amount in Risky Assets
With high levels of risk, there’s a chance for higher returns. But there’s also a chance that you’ll lose it all.
And though making money quickly is gratifying, it’s not the best way to manage your risk tolerance.
Instead of investing most of your funds in high-risk assets, invest only a small percentage towards those companies. This way, you’ll still have the opportunity to get those high returns you love. But you’ll do it without putting the bulk of your wealth at risk.
Keep in mind that every person’s risk tolerance is different. When you’re younger and have more opportunity to recover lost money, you can afford to invest a bit more in riskier assets.
But as you grow older, you’ll want to put more of your money towards low-risk investments. This helps you protect your retirement income and improves the likelihood that you’ll have enough to support yourself.
4. Get Help from a Trusted Firm
It’s possible to invest money on your own. But that doesn’t mean you have to. And as your wealth grows and your worries about risk tolerance and risk management increases, you’ll want to get help.
Look for an experienced financial advisor to give you guidance on the types of investments you’ll want to make.
If you’re worried about costly fees or want to continue to take a hands-on approach towards your investments, consider educating yourself on financial risk management. View here to learn more about your options and the types of things you’ll want to learn to fully protect yourself.
5. Sell When the Time Is Right
There’s an old piece of advice that most investors follow: buy low and sell high. This means buy assets when they’re cheap and sell when they’re at their peak.
While this is good general advice, it’s also key in managing your investment risk.
Periodically look at your portfolio and see how your assets perform. Then think about how much money you have in each type of investment.
As one type of investment grows and the value of those shares increases, consider selling off a portion of your shares. This will help you consistently diversify your portfolio throughout your active investment life.
6. Buy Quality, Not Just Quantity
Even in the investment world, you need to pay attention to the quality of the shares you’re buying. This is most important when you’re buying bonds as part of your diverse portfolio.
As a general rule, look for high-yield, high-quality bonds. Most often, these will be short-term investments that mature completely in a few years rather than over a decade. But how can you tell what the quality is?
All bonds contain a letter grade based on its credit quality. Higher-quality bonds have ratings of AAA while lower-quality bonds will have ratings of BB+ or lower. The more letters, the better the bond.
Remember, bonds are effectively loans. When you buy a bond, you’re paying for a project and earning interest on that amount when the bond matures. Higher ratings mean there’s less risk of the organization defaulting on the bond.
When choosing assets, pay attention to the quality of the asset you’re investing in. High-quality funds are almost always going to be better than low-quality alternatives.
7. Be Vigilant
No matter what you do, pay attention to your portfolio. Being vigilant helps you manage your risk and makes it possible for you to predict behaviors with your investments over time.
The more you can notice trends, the better prepared you’ll be to make adjustments.
This doesn’t mean you need to monitor its performance every week. Just check in whenever you feel it’s necessary. If anything needs to change, make the necessary changes.
Final Thoughts on Managing Investment Risk
Every investor must manage some degree of investment risk. And that risk level will change as your portfolio changes.
Keep these tips in mind and do what you need to do to keep your portfolio diverse and earning.
For more helpful tips, check out our latest posts.
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