Tips to Cut Investment Risk
Investment has never been easier thanks to the march of technology, but it’s also not without potential pitfalls. Here are some ways to help you invest while also reducing the risk attached.
Risk is Part of Investment
To a greater or lesser extent, every action taken with money is a risk. Even placing it in a current account with a major financial institution can end up going wrong (as we saw during the financial crisis), though the odds are good for the individual. Investment does necessarily entail a degree of uncertainty and it is simply not possible to invest with no risk whatsoever. However, as with many things in life, there are numerous strategies available to minimize the potential pitfalls.
Naturally, gambling has a reputation as a high-risk financial activity. However, there is a way to reduce the risk to zero (ironically making casino betting safer than financial investments). No deposit USA casinos are an attractive proposition because the only two outcomes are winning real cash, or losing nothing (as no deposit is required). Whether they require coupon codes or not, anyone who likes the idea of betting but are risk-averse, it’s the ideal way to use betting as a potential investment along with some fun.
Liquidity risk involves the problem not of having insufficient funds (or stocks and shares worth said funds) but being unable to access them due to restrictions preventing the immediate sale. This is one of the easiest risks to avoid falling foul of, provided you always allow yourself a certain amount of leeway (unexpected bills can always arise on a personal level, and world-shaking events, whether a pandemic or financial crisis, are unlikely but credible possibilities). Simply avoiding sailing too close to the wind is enough to ensure you won’t end up in the awkward and annoying position of having the money to do what you want but being unable to access it.
Taking advantage of pooled funds can help mitigate risk by spreading investment across more firms (so if one should hit trouble this can be counterbalanced by growth elsewhere). Examples of such pooling include unit trusts, Open Ended Investment Companies (OEIC), or investment trusts. Note that these will involve a fund manager making decisions in your stead, bringing their professional experience to bear. This does not eliminate risk, of course, but it does help to reduce it.
Risk Tolerance Varies
It is as well to acknowledge that while everybody dreams of a big potential return and zero risk, in the real world, tolerance for risk and the appetite for it varies considerably between different people. The greater the risk, the greater the potential of a loss which is to be avoided. At the same time, it’s not possible to have no risk whatsoever. Finding a happy medium requires investors to be honest with themselves, to be willing to take professional advice, and to be hard-headed and realistic, shunning promises of huge returns in favor of more plausible forecasts.
Have an Eye on the Long Term
Overall, investments need to outperform two measures to be considered a success. These are inflation (which erodes the value of money) and basic cash bank accounts. After all, if you can get the same return by placing your money in a financial institution there is no incentive to opt for stocks, which do come with more risk. Happily, the stock market does significantly outperform both of these measures typically, but this should always be kept in mind.
The time scale is important for this. Companies should be invested in when the total value that can be generated is greater than the price of investment. Growth can be rapid or slower, but the key is backing a firm that will end up making more than enough gains to be worthwhile in the end.
The Market Will Drop
Nothing rises forever, and the market, sooner or later, will decline in either a minor or major way. This must be expected, just as rainy days are bound to come around. Not only should investors not panic if a stock’s value goes down rather than up, a drop in the market is also an opportunity to invest in something that has a lower price than it actually warrants.
One aspect of the pandemic that is little discussed is that it coincided with the rising use of trading apps and increased investment activity. These are not bad things in and of themselves, but there are some concerns, prompting the UK’s FCA (Financial Conduct Authority) to warn against risky investments based on the excitement factor and to urge investors to focus on long term gains. Cryptocurrency and foreign exchange are two such examples highlighted. The rise of Bitcoin and other currencies is well-known about, but these are highly volatile and have been known to crash as well as soar in price. The role of an investor is to try and get a good long-term income. Excitement belongs to the realm of films, books, video games, and TV shows and should have no role in affecting investment decisions.
That brings us to the end of our look at risk in investment, and how to cut it down. Always keep in mind that the market can go down as well as up.