Strategies to Reduce Your Investment Risks

In today’s volatile market, you need to manage your investments in your portfolio. Most investors are aware of the fact – the higher the return, the higher the risk. Your investment portfolio is your risk or your return based on how well you manage it. Though having a risk is not a bad thing, all you need to understand is how you can manage the risks that you take with your investments and how you can aim to reduce them. Even if you are a beginner or dealing with high risks already, here is a practical guide to taking better profitable investment decisions.

Strategies to Reduce Your Investment Risks

Strategy 1: Rebalance the Investment Portfolio

As an investor, you need to make a list of your investments (assets and liabilities) in the portfolio. The main advantage of making a portfolio is to create a list where you can easily analyze your overall investment performance and determine your financial objective. For instance, if your investment objective is to pursue growth financially and you are willing to take the market risk, you may decide to place 60% in stocks and 40% in bonds. When you rebalance your portfolio annually, it helps you track your investment performance and reanalyze your financial objective.

Strategy 2: Analyze the Risk

Now that you have created the portfolio, you can easily analyze the risks of your investment. Know your risk tolerance limit through your net worth. Deduct the total amount of your liabilities from the total amount of your assets. If you have a higher net worth, you can afford risk tolerance. If your net worth is little or nothing, you don’t have enough risk capital which means you need to reduce the number of investments to minimize risk.

Strategy 3: Diversify Your Investment Portfolio

Portfolio diversification is the process of electing a variety of investment instruments which leads to the reduction of risk. Rather than putting all the eggs in one basket, you need to distribute the eggs in different types of baskets as well. Having all your money in one investment instrument can be risky. Diversification helps you to distribute the risk in various other instruments. For instance, if you put all your money into stocks, you have a chance of losing the money if the share market crashes. Instead, invest 50 % in stocks, 30% in real estate, 15% in fixed deposits, and 15% in bonds. Even if there is a crash in the share market, you can rely on bonds, real estate, and fixed deposit till the market recovers.

Strategy 4: Monitor Your Investments Regularly

If you have investments that depend upon the performance of the market, it is essential to track the market regularly. You need to connect with the trends in the stock market. Any fluctuations with the price can lead to loss or profit. Tracking your investments and their respective markets helps you to decide whether you will need to keep the investment, buy it, or sell it. Your research can help you allocate your investments on factors such as your age and how long can you continue investing in that particular instrument.

Strategy 5: Reduce Unnecessary Volatility

While you prepare the portfolios every year, try comparing both the investment portfolios (of the current and previous years). By doing this, you are analyzing the performance of your investment and comparing them. If two instruments are providing you the same average returns, and you need to reduce risks, choose the investment that has less volatility with less risk. A less volatility instrument will have a higher return.

Strategy 6: Invest for a Long Time

Long term investment exhibits lower volatility compared to the investments held for a short period. If you have an instrument that can give you much more return, in the long run, invest in it. If you are considering an investment for a long period, you can minimize your risk with an expectation for a higher return in the future. The longer you invest, the longer you will be able to weather the low market periods and gain tax advantages during a capital gain.

Strategy 7: Take Advice from a Professional

Many professionals can manage your portfolio to help you reduce your work in terms of tracking and researching. A good professional will be able to give the right advice to help you gain control over your financial future. You may get free advice or pay them to help you choose the right investment that suits you and your financial goals. They also consider the ability to manage your money and your attitude towards investment risk. The experts are always updated with the market and its trends; thus they have enough experience and knowledge to help you reduce your investment risk.

We hope the above-mentioned seven strategies can help you invest in more investment instruments in Singapore. So avoid taking any panicky decisions due to higher risk and stay the course with your investments by making sound decisions.

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