Investing always comes with some level of risk but don't worry, we'll take you through how to manage it. In this guide, we'll show you how to spot different types of investment risks and share some strategies to keep them under control. Let’s dive in.
Key takeaways
Investing involves risk, but with careful management, you can navigate it successfully.
Be patient with your investments. Long-term strategies can help you ride out short-term market ups and downs.
Crafting a solid plan, making regular investments, and learning from experienced investors are key strategies for making smarter investment decisions.
The risks of investing in shares
While some risks can be managed with smart investing, others, like a financial crisis, can impact everyone. The best approach is to stay informed and ready, so you can handle any challenges with confidence. Here are some risks that you should be aware of:
Loss of capital
Think of investing like planting a garden. Often, with careful attention and effort, your garden flourishes and you enjoy the rewards. However, just as bad weather can harm your plants, various factors can decrease the value of your investments. Market drops, economic downturns, global events, or company-specific issues are all risks that can affect your investment's performance. If you decide to sell during such a downturn, you might lose money, and in some cases, you could lose most or all of what you invested.
Volatility
The stock market can be volatile, which means prices can fluctuate widely and rapidly. These changes can happen because of news about a company, how people feel about the market, or bigger changes in the economy. Volatility can be tricky because it's stressful when prices suddenly drop, which might make investors act quickly and without much thought. This could lead to selling stocks at low prices and losing money.
Timing
When you buy or sell shares, deciding when to enter or exit the market is risky because the future is always uncertain. For instance, you might buy a stock when its price is low, hoping it will rise, but sometimes those prices keep falling. On the other hand, you might invest when prices are climbing, only to see the market crash soon after. This unpredictability makes 'timing the market' a challenging and risky task.
Poor advice
Relying on biased or outdated information can impact your investment decisions. For example, a friend or someone online might tell you about the next big thing. There’s a lot of misguided advice and 'sure thing' stock tips on the internet. If you don't do your own research and form your own opinions, you might end up making poor investment choices.
Managing investment risks
While you can't control everything in the investing world, there are some smart moves you can make to manage and reduce risk. Here are some practical tips:
Allow time for investments to perform
The stock market can be unpredictable in the short term, but historically, it tends to go up gradually over time. Investing for the long term helps you catch these gains. It also keeps you calm during market dips, so you can focus on the big picture and watch your money grow over the long term.
Investors often have short and medium-term goals depending on their needs, and that's completely okay. However, investing for the long term and gaining from both capital growth and dividends lets you tap into the power of compound interest. This strategy can significantly accelerate your gains over time.
Learn how to diversify
Diversification is about spreading your investments across different types of assets, industries, or places. This approach helps lessen the risk of losing money if one particular investment doesn't do well. But it's not just about avoiding losses; diversification also lets you take advantage of different opportunities. Different investments can do well at different times, depending on the economy. By diversifying, you can improve your chances of making money while lowering your risks.
Master your emotions
Investor psychology is important because emotions can affect how you make investment decisions. For example, fear might make you sell too quickly, and greed might make you buy too much. To tackle this, investors could start by crafting a solid plan, making regular investments at intervals, and soaking up the wisdom from seasoned investors. This way, you can make calmer, smarter decisions that set you up for success in the long run.
Analysing your portfolio
Reviewing your portfolio can help you identify any potential adjustments needed to help mitigate risk. If you notice a sector or company showing risk warnings, it may be time to make some adjustments. Similarly, your portfolio gets too concentrated it may be time to rebalance it. This means selling some investments and buying others to spread out the risk.