4 Ways to Manage Investment Risk

Investment risks are a part of putting money into the financial markets. While you have to live with some amount of risk, you can manage it in a number of different ways. Here are a few ways to manage your investment risk.

1 - Diversification

One of the best ways to manage investment risk is to diversify your portfolio. Many investors try to put all of their money into one particular investment. For example, they will find a company that they like and then put a good percentage of their investment capital into stock in that company. The only problem with this is that if the company goes out of business, you could lose your entire portfolio. Instead of putting all of your money into one company, you need to spread your money around. By investing in many different companies within different sectors of the market, you are going to be able to lower the overall risk of your portfolio.

2 - Asset Allocation

Within your portfolio, you also need to utilize asset allocation. This is a concept that deals with how you divide your money up between the different types of asset classes. For example, many investors will put a certain amount of their investment capital into stocks and a certain amount into bonds. By doing this, you are going to be able to avoid problems when the stock market does not perform well. A portion of your money will be tied up in other investments. When you practice asset allocation, you need to stick to a specific percentage of each type of security. You might put 60% of your money into stocks and 40% into bonds. As you get older, you may want to readjust this percentage to a more conservative mix.

3 - Research

Another way that you can manage your investment risk is to research. Before you put money into any investment, you need to make sure that you have thoroughly researched it. Many investors randomly invest in stocks and other securities because someone said something good about them. If you use this method of investment, you will be disappointed more often than not. In order to be a successful investor, you need to spend a good amount of time researching every investment that you are considering putting your money into. By using careful research, you can potentially lower the amount of risk that is inherent when you invest in a particular security.

4 - Watch Your Portfolio

Another way that you can potentially lower the amount of risk in your portfolio is to watch it carefully. Many investors do not pay attention to what is going on with their investments and end up losing money as a result. If you will pay careful attention to what is going on with your investments, you can adjust your investment strategy if it starts to perform poorly. This will help you lower the overall risk and bring in higher returns. 

blog comments powered by Disqus