Risk is absolutely fundamental to investing; no discussion of returns or performance is meaningful without at least some mention of the risk involved. However, if you lay awake all night worrying about your investments, they are probably too risky for your investment temperament.
Here are the top strategies to stay balanced and curb your investment risks.
Research Extensively On Your Intended Investments Before You Invest Into Them
I once pointed out in one of my previous publications that one of the ways you’ll expose yourself to a vast cloud of risks is by investing into what you don’t really know about; ‘cos I was once a victim of this. Don’t just rush off into an investment venture with the hype and triggers hindering you from checking out both online and offline the investment’s history, how it works and other sensibilities. This is one of the best thing you will do for yourself as you will discover lots of things that will either cheer you to go ahead or caution you to back out.
Know Your Risk Tolerance Level
Two factors that can help you determine your risk tolerance are your net worth and your risk capital. Your net worth is your assets minus your liabilities. Your risk capital is the money that, if you lose on an investment, won’t bring much sorrow to your heart. Although no one ever lose even the smallest amount of their hard earned money and feel happy and reluctant about it; the point here is the level of pain you’ll feel for losing that amount of money. If you have a high net worth and substantial risk capital, studies show that you can afford to have a higher risk tolerance, but if your net worth is little or next to nothing, and you don’t have much risk capital, you probably will be better off with low/zero risk investment options.
Diversify Your Investment Portfolio
Have you ever heard the saying, ‘DO NOT put all your eggs in one basket’? It remains valid even till today especially as regards to investment risks. Diversification reduces your overall risk by spreading it over a variety of products. Diversify your investment portfolio by mapping out by percentage the investment capital you invest into each of your investment option. Yes, there’s also a contrary saying to that which says ‘put all your eggs in one basket and watch that basket’; but believe me, this saying does not apply to investment risk but to being focused in whatever thing you do and not having a divided attention.
Rebalance Your Investment Portfolio Regularly
Rebalancing is an important and often overlooked step in creating and maintaining a diversified investment portfolio that is consistent with your risk tolerance.
After you set up your initial asset allocation, the different investments in your portfolio will gain or lose value as the market goes up and down. Since your underlying holdings are not the same, they will all behave differently as the market moves, some growing much faster than others. In order to regulate and keep your risks at minimal, you must rebalance. This has to do with your shuffling the investment options in your portfolio to suit your risk tolerance.
Take Advantage of Low/Zero Risk Investment Options
As much as investments are dotted with risks, there are investment options that its nature makes them low or zero risk. a low risk investment is an investment in which there is just a small chance of losing some or all of your money. There is a low probability of losing some or all of your money. Sometimes, this type of investment are so trusted to yield the expected returns or at worst return the invested capital that it is termed, a zero risk investment. For example, In Nigeria, the National Deposit Insurance Corporation/Company (NDIC) insures your deposits at member banks. the federal government bonds and treasury bills are also low risk investment options that are backed by the full faith and credit of the federal government through the Debt Management Office and central bank.
People who base their financial decisions on emotion often end up in their comfort zone where they feel safe but financially low. This set of people ultimately have a harder time reaching their long-term financial goals.
It is best to launch out into any investment option(s) of your choice, applying the strategies to avoid or lower risks and thereby reaching your financial goal.