Tips for Preventing Risk on Your Investments
Did you know that a savings account actually loses you money? If you did, congratulations! You are a bit more financially knowledgeable than your average countryman.
The reason for this is that savings accounts today don’t outpace inflation (which happens even when the dollar is strong), so every year that money sits in one makes it worth less and less.
Because of this fact, it begs the question as to what you should do with your money, if saving suddenly isn’t as fiscally smart, anymore.
The answer is to make your money make you money, so that it doesn’t only outpace inflation, but actually generates more capital. This is done by investing.
However, the flip side to investing is that there is always the risk that you lose more money than you make. But no risk, no reward, right!? Here’s some tips on how to better invest without unnecessary risks…
Don’t panic
First of all, the most important thing to remember is never to panic. Panicking is the number one mistake that amateur investors make that loses them money.
There is a natural ebb and flow to stock markets, and you shouldn’t overreact to every little thing that happens. Off the bat, this is contrary to the primary principle behind how investing should work, which we’ll cover in our next point.
The real trouble that investors get into when they panic is that they sell their shares to prevent further losses if they drop too much. However, those losses are only losses on paper, and don’t become tangible losses until you sell.
If you are managing your own portfolio, take measured steps and always look at the long game. Short term investing only leads to chaos.
Buy low, sell high
The biggest rule of investing is this: buy low and sell high. You want to purchase stocks that are at their lowest price point, so that you can sell them at their peak.
The issue is predicting exactly where these valleys and peaks are. Ironically, many people do the exact opposite of this. Psychologically, people are more likely to invest in a stock that they see has been climbing for months, rather than one that has declined to its cheapest point.
This feeds into our last point. When investors panic as the value of their shares drops, and then proceed to sell those shares, they are doing the exact opposite of what they should, and are selling low.
Use experts
Trying to watch the market and develop a winning investment strategy takes a ton of time. You want to diversify your portfolio across multiple markets and industries, so that all of your eggs aren’t in one basket.
This takes a lot of energy that you probably don’t have, in addition to your other forms of income. For this reason, most investors turn to professionals who run portfolios that make educated decisions about where to invest.
They can mix your portfolio between low-risk bonds, high-risk stocks, and even put your money in a larger fund with other investors. There are a variety of ways that this is done, whether through a mutual fund or a special purpose entity.
Only take inspired risks
At the end of the day, if you really want the most bang for your buck with your investments, you can’t do it by taking the lowest risk options every time. At some point, you’ve got to put some skin in the game and take risks that have the potential for high payoffs.
The trick is knowing exactly when those risks should be taken. You can do plenty of research (or your fund manager can) about what industries are emerging and how best to proceed with certain companies, but there is still always the risk of failure. Nobody really knows what is around the corner, although we can better our odds of guessing.
For this reason, as a general rule, only take a big risk if you feel like it’s in a company that you feel proud of owning a part of (in addition to clear and defined market research, obviously).
Investing in a startup that you truly believe in gives you a little something more to believe in with your portfolio, and opens up the rest of your portfolio to emotion-free investing.
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Category: Investing
