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Personal Wealth and Finance


Investment Risk Reduction

April 1, 2020

Markets are cyclic and move according to economic indicators, business performance, and many other factors which cause people to buy or sell investments. Here are a few ways to minimise risk when investing:

  • Diversity for Control To achieve maximum growth and balance risk, invest in various mutual fund investments, which combine the right mix of asset types — cash, bonds and stocks. With diversified investing, one part of your investment portfolio will always perform better than the other. While building your portfolio, many choices among financial vehicles are available.

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A “safe” investment today may only yield 2% per year. Such safety could prove to be your biggest risk if this is all you invest in. There are alternative investments. Consider your age, your need for financial security, and your long-term and short-term goals. Combined, these factors will determine how you should balance your investments. If you have a long period of time before retirement, consider adding equity funds in a well-managed portfolio.

  • Asset Allocation It is difficult to time the market successfully. Let the pros do it! Some fund companies will move your money automatically among asset classes for you, using a specialised asset allocation service. This saves you the risk of trying to outguess the market on your own.
What investments are good to use in my asset allocation?
Equities (stocks), bonds, cash, commodities, foreign and domestic markets, small and large companies are amongst the offerings—each asset class behaving distinctly from the others. Risk increases when equities are in a portfolio—the tradeoff is an increased gain when the markets do well. Conversely, bonds appreciate in value slowly over time and can reduce the equity risk component. An advisor can help you select the right mix according to your risk tolerance—a test based on your time to invest and the level of anxiety that you may experience while investing.
  • Buy & Hold Strategy Many investors have been extremely successful in purchasing equity mutual funds with an excellent performance record because they have stayed invested even when the markets were declining. Granted, it doesn’t make sense to invest next month’s mortgage payment or money you’ve saved for a trip in a buy-and-hold strategy. The secret is to invest capital you can keep invested for at least five years. You may be tempted to sell or transfer investments in a panic if the market indicates a downturn. Remember, knee-jerk reactions without advice only increase risk. Indiscriminate fund selling or switching during a market decline could reduce your chance of recovery or trigger capital gains taxation. Adhere to your plan. Rather than sell, consider buying mutual funds at lower unit prices if the market goes down a little. Above all, make sure you get your advisor’s guidance based on your risk profile.
  • Market Psychology Stock markets move, in reality, according to the mass psychology of the people. When the majority of the people optimistically believe in a healthy economy, they invest and stay invested. This belief has funded the tremendous advance of our current economy as people continue to invest more of their savings in business ventures using mutual funds. On the flip-side, if people feel pessimistic about the success of companies trading stock in the market, they can influence others who follow like lemmings. Following the crowd, they may run fearfully out of the market precisely at the wrong moment — increasing their risk of loss. It is the collective feelings of people en masse that move market trends, up or down.
  • Dollar-Cost Averaging By investing in mutual funds over specific periodic intervals such as monthly or quarterly, you can reduce risk. This is accomplished by taking the personal gamble out of trying to buy low and sell high. You average your investments, buying during the entire market cycle. You buy when the stock market is rising — the bullish period — and also when it is declining — the bearish phase. Dollar-Cost Averaging simply balances mutual fund purchases. It solves the problem of over-investing during high markets, while in low markets you automatically gain because you are bargain buying precisely when many mutual fund units prices are lower.

 

 

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