Almost every investor gets frightened by investment risks. There is no financial asset without its own risk. The best approach is to learn how those risks can be managed. According to Benjamin Graham (the pioneer of value investing), successful investing is all about how you manage risk – and not by avoiding it.
The fact is, you can’t avoid investment risks completely. But it can be reduced. How you do this is to understand certain risk management principles and effectively apply them.
How to Reduce Investment Risks
There are different ways to reduce investment risks. Below are 3 of them.
Never time the market
To time the market is undeniably challenging. You rarely do it successfully. Even proficient Investors don’t always hit it right. Consistency is vital for investors with a longer time horizon to build wealth.
Coming in and out of the market will only make you miss out on the best days of the performance. It can be risky. No doubt, you will miss a portion of the terrible days too. However, you will be missing most of the best days. Do not time the market!
Understand the various kinds of risk
Investors don’t need to see risks as good or evil. A portion of understanding risk and what it implies is to know when to take it and when to avoid it.
According to experts, risks can be classified into 3 sections – emotional, mathematical, and behavioral. Emotional risk has to do with the way investors feel whenever prices fall or rise. This helps them understand how many risks needed to be taken.
For the mathematical risk, it is how much investors need to take to accomplish their objectives. Behavioral risk is how much risk investors might have taken before and how they responded when the price fell. These three types of risk often occur. Smart investors are well prepared for them before a trading session.
Always plan ahead
To become a successful investor, you ought to create a goal(s) for your money. You also need to make it a habit to always have a written plan for your goals. Your objective and the sort of risk you need to take to accomplish the objective ought to be aligned.
As an investor, always review historical returns. This helps you comprehend what sort of returns are truly attainable. It is very important to glance back at history, especially if you are new to investing. This act alone can help you avoid recency bias – that is, the belief in the continuation of the current market conditions.
All investments come with all sorts of risks. Risks can’t be eliminated. But it can be reduced and managed. Understanding the three types of risks will help you plan. Also, don’t time the markets. Finally, reach out to Invescap for more on investment. Invescap has been around for decades and it was founded by Marc André Pépin a renowned investor.