Imagine having all of your stocks in one industry. Then, all of a sudden, something unexpected happens. A pandemic, for example. By the time you feel the need to do something about it, it’s likely gonna be too late to reduce the damage.
That being said, investing is a great choice for every individual who wants to improve his lifestyle, make another stream of income, multiply or simply save the money he already owns, or invest in his future, making a strategy for a calm, stress-free retirement.
However, is putting all of your money in stocks the only thing you need to do? When it comes to stocks, it’s all about the returns. Although there are people who are passionate about the investment process itself, or who want to apply their knowledge to something practical, the main reasons for investing are the money returns that can provide you with high returns and great benefits in the long run.
To be able to make smart choices and wise moves, you need to get educated in this field, and to constantly keep on track with all the changes on the market. But as we previously mentioned, sometimes the markets stumble and fast decisions are not enough for a successful result.
Therefore, people started working on certain strategies that would allow them to get secure about their investments in the best way possible, since there’s never a safe guarantee that a market will stay under control, steady and with no losses or complications. One of the techniques for reducing the possible risks of the rocky events is called – diversification.
Diversification is a process that if done properly, can really be your ally in the investment battle. Simply put, it means investing in different financial industries, classes, instruments and funds, to avoid the consequences such as an enormous drop of value, due to some global or local events.
That said, you get to save your balance from all the downsides of the market crash. Not putting all your eggs in one basket is a great saying that can easily be understood but not so easy to apply in real life. To be able to make smart choices that will diversify your investment portfolio, you’ll need to indulge in a continuous learning process, and use reliable and reputable sources of information such as this website.
Reducing your risks is an obvious goal in every situation, not only the unfortunate one. Still, you need to build a portfolio that will withstand market changes, especially losses. Although there’s no perfect solution for every investor out there, some things can be applied to handle the market rollercoaster better.
1. There’s Always A Certain Amount Of Risk
The risk is inevitable. That’s why it’s called investing. Every market is like a live organism, with all its needs, changes, ups and downs. It’s important to stay aware that not everything is within your control. Another thing to be aware of is the fact that in investing, just like in life, the risk goes with the reward. By reducing your risk, you’re also reducing the reward you’ll eventually get. Still, finding the right balance is the best option you can choose. Among several types of risk, you can only reduce the one that’s called unsystematic. It is linked to a specific company, industry or economy. You should aim for reducing your exposure and invest in different aspects. Still, the market risk can’t be changed. You can only accept it.
2. Know Your Limits
Knowing your limits is equally important as making the right decisions. This means that you need to be aware of your possibilities, time, energy and resources. You also need to be aware of your return rate, and make sure you don’t ruin your returns simply out of fear of losses. Diversification of your wealth is an essential thing to do, but only within your personal limits. This means that you shouldn’t relocate your money into a million pieces, because you’ll not be able to handle it. While there are always exceptions, an optimal number of different stocks would be somewhere between 15 and 30. If you decide to go with 50 stocks in completely different industries, it already sounds like you’re about to bite more than you can chew. Try to reach the optimal diversification rate, but stay within your limits, if you wanna yield the best long-term results.
3. Include Several Funds
You’ll obviously need to include several categories. But what does that include? After you’ve diversified once, there are subcategories. Mutual funds combine the money of many people to buy stocks, bonds and other securities. Index funds are a type of fixed sources that are great for fighting the market volatility. You should also consider individual stocks which means that you set your own ratio, according to your personal criteria. Not only levels and type but companies’ size is also to be considered as a great way to contribute to your diversification, so include both large and small ones.
4. Keep Things Under Control
Investing and diversifying is not the only thing you should do. After you made crucial decisions, it’s time to maintain your portfolio. This means you need to take care of it regularly, whether it means once in a couple of months or once a year. Rebalancing should be emphasized enough since it’s almost as important as the initial process. Keep track of your under balanced investments and relocate your funds accordingly. If needed, sell and move on to the next investments, to increase the overall value and reduce the losses.
5. Have Fun
If you don’t enjoy it, it’s gonna be harder to understand and harder to master. Learning, getting informed and understanding the investment process will lead to enjoyment. If you act disciplined, and if you invest your time in learning and your money in investing, you can expect fantastic rewards that are worth the risks, efforts and experiences. Including the right strategies or making your own will allow you to profit from investing, even in the worst case scenarios, when there are the biggest downfalls on the market. Makes sense?
Nicola Holder