When it comes to investment strategy, balancing risk with reward is the key. It is often the case that the bigger the risk, the larger the possible reward. The key thing to bear in mind is that risk is unavoidable when it comes to investment. What matters is how you manage it.
Even if you have become an expert in stocks and the markets where you intend to invest, and you have the advantage of finding a good chatroom for trading news, if you haven’t got a plan for managing risk, you won’t be a success. Here is a short guide to reducing your risk level.
Do your homework
You can never do too much research as an investor, and one of the many advantages of doing your homework is that you will give yourself the best chance of keeping your risk to an absolute minimum. Before you take the plunge and make an investment, be sure that you have checked all of the important indicators for that stock, and that you have compared them to similar stocks. One of the most important figures when assessing the risk of an investment is the Price to Earnings ratio, also known as P/E. This gives you the relationship between the stock price and earnings; the higher the figure, the bigger the risk.
How much risk?
Risk can be assessed at an even more fundamental level, and it is important to ask yourself how much risk overall you are prepared to take on. One way of assessing this is to focus on two key figures: net worth and risk capital. Risk capital refers to money that you could in theory afford to lose, while net worth is your assets minus your liabilities. For those with small net worth and minimal risk capital, then low-risk investments are the best choice.
There is another handy way to minimise your risk and that is to ensure that your investments are spread across a range of markets and financial products. This is a strategy called diversification and it is a handy way of reducing the risk of your investment portfolio. If you chose to split your investments between Treasury bonds, the stock market and property, you will spread your risk. That will come at the potential cost of lower profits, but it will help to ensure that any loss in one sector has only minimal impact on the whole portfolio.
Keep an eye on your investments
It is also an essential part of risk management to have a hands-on approach, and to monitor your portfolio on a regular basis, to ensure that your investments are correctly allocated and that you are moving towards your investment goals while bearing in mind your risk tolerance. It is a good idea to check your portfolio on at least a monthly basis to keep your risk low.
It is impossible to avoid risk when you are making investments, but by bearing these tips in mind, you can avoid unnecessary risk and keep its level under control.