Strategies to Manage Risks of Investing in The Stock Market

There are many country specific and industry specific risks when investing. Because there is a tentative relationship between the government and businesses, there is always a risk that government actions could constrain an industry or corporation. Likewise, business executives could make poor decisions or get caught-up in a scandal. Without a doubt, such actions would adversely affect an investor’s holdings in that business and/or sector.

As an investor, the best thing you can do is read reviews, educate yourself and know the risks before investing in something. This cautious approach will encourage you to:

  1. Seek Advice
  2. Diversify Your Portfolio
  3. Make a Long-Term Commitment

Strategy One: Seek Advice.

When you don’t understand how the stock market works – like what makes a stock’s price rise or fall, it becomes an especially risky investment. The more you know, the more you can lower this risk.

If you don’t feel comfortable with your understanding of an investment, ask experienced investors to help you choose stocks and other alternatives that help you achieve your financial goals, as well as meet your tolerance for risk.

Strategy Two: Diversify Your Stock Portfolio.

You can reduce your overall risk by owning stock in companies of different sizes and different industries. As well, different types of stock offer fixed returns that can be counted upon to offset losses in other investment areas.

  • Type of industry – While companies in one industry may be struggling, companies in another industry may be performing well. For example, manufacturing stocks might slump when technology stocks rise.
  • Company size – Investing in a small, new company has the potential for higher growth. That said, it is usually riskier than a larger, more established company would be.
  • Type of stock – Preferred shares tend to offer lower risk and returns than common shares. But, unlike common shares, preferred shares pay a fixed dividend. You may want to choose both for your portfolio.

Strategy Three: Make a Long-Term Commitment.

As I am sure you are aware from the recent U.S. elections and the Brexit vote, the stock market is subject to short-term fluctuations and bear markets. Volatility aside, historically the stock market has performed well over the long term.

Because of the uncertainty associated with the stock market do not invest with money that you will need back soon. If you do, you run the risk of being forced to sell during a period when a stock’s price is low.

When risks affect the market or the economy, investors must rely upon their well-constructed portfolio to protect their investments. Making educated investment decisions that work toward your goals, and are mindful of your exposure to adverse conditions, will keep investing risks at an acceptable level.

Build a Well-Constructed, Well-Maintained Investing Portfolio

The investments in your portfolio can be comprised of a wide range of asset classes. They might include stocks, government bonds, corporate bonds, real estate investment trusts (REITs), exchange-traded funds (ETFs), mutual funds, and certificates of deposit. Also, you may want to include hard assets, such as commodities, commercial or residential real estate, and timber.

A well-constructed and well-maintained investment portfolio is vital to your success. This begins with:

  1. determining an asset allocation that best conforms to your personal investment goals, and
  2. your tolerance for risk.

1. Asset Allocation

Establishing an appropriate asset mix is a dynamic process, and it plays an important role in determining your portfolio’s overall risk and return.

To achieve the ideal asset allocation you must determine your individual financial situation and investment goals. Important things to consider are age, how much time you have to grow your investments, as well as amount of capital to invest and future capital needs.

The motivation of asset allocation is to put your money to work in the best possible places, and in doing so, spread your risk across different investments so you won’t be overly exposed to a downturn in one particular sector. Throughout the entire process of allocating assets to your portfolio, it is important that you remember to maintain your appetite diversification above all else.

2. Risk Tolerance

Another factor to consider is your tolerance for risk. You should have a realistic understanding of your ability and willingness to accept large swings in the value of some investments.

Factors that can affect your risk tolerance are:

  • the amount of time you have to invest,
  • your future earning capacity, and
  • the presence of other assets such as a home, pension, inheritance, etc.

Generally speaking, the more risk you can handle, the more aggressive your portfolio will be. This could mean that you devote a greater portion of your portfolio to the risky stock market, and less to bonds and other fixed-income securities. Other the other hand, if you prefer less risk, your portfolio will be more conservative; in order to protect its value.

Building a well-constructed and well-maintained investment portfolio is a complex process. It requires that you constantly analyze your personal financial situation and balancing it against your goals and objectives. Factors that are likely to evolve over time are your financial situation, future needs, and risk tolerance. When these things change, you must adjust your portfolio accordingly.