Most investments fail because people take in too much risk. So, what should you do to reduce risk when investing? Below are proven strategies regular investors can use to manage risk.
Strategy 1: Invest in financial education
Most people make investment mistakes because they don’t take time to invest in financial education. You can’t be a successful investor if you don’t know anything about investing. You can hire an investment professional to invest for you. However, you’ll need to a lot of money for such an approach to work. Financial education is very important. You need to know why investing is important in the first place. You should also know the different types of investments available to you among other basics. Financial education helps you make informed investment decisions. You may not become an investment expert yourself by studying basics, however, you will be able to avoid common investment mistakes made by most people if you are financially literate.
Strategy 2: Choose investments you are familiar with/passionate about
Another great way of reducing investment risks is to invest in opportunities you are already familiar with or passionate about. Sometimes it may take a lot of time, effort and money to get adequate financial education. If so, invest in an opportunity you are familiar with or passionate about. It could be anything really. It’s easier to set up a business revolving around your passion or something you know a lot about rather than attempting to learn something new from scratch. Remember, risks emerge mostly from the unknown so, choose investments that you know much about or have an unmatched interest in.
Strategy 3: Take the relevant insurance
One of the best ways of managing/avoiding risk is taking insurance. The insurance industry in the UK as well as globally has countless insurance covers that take care of all types of risks imaginable. If you are investing in rental housing, for instance, you can take loss of income insurance to cover you when you don’t have tenants. Such a cover eliminates risks associated with having empty rental units especially when you are servicing a loan. Before you start investing, shop for relevant insurance products that can help you reduce risk.
Strategy 4: Start small
You can also reduce investment risks by starting small. This strategy is perfect when you don’t know much about the investment opportunity you want to pursue. When you start small, your risks are also small. Your financial stability stays intact regardless of the outcome. You can then grow your investment when you can handle more risk.
Strategy 5: Focus on organic growth
This strategy is perfect when the investment in question is a business. Most people make the mistake of growing ahead of the actual business. According to most investment experts, you should allow your business to grow organically if you are keen on avoiding risks such as lack of customers. For instance, you should take a loan to expand your business when you have already started your business and noticed the demand for whatever you are selling is increasing. Taking a loan to expand a business when there is no demand for your products/services exposes you to a lot of risks.
Strategy 6: Reinvest profits
It’s less risky to reinvest profits instead of borrowing a loan to invest. When you take out any loan, there is always the possibility of being unable to repay the loan for reasons that may be beyond your control. To avoid such risks when investing, consider reinvesting investment profits first before you think of investing using a loan.
Strategy 7: Diversify
Diversifying is one of the best ways of reducing investment risks although it might reduce your ROI. Concentrating on one investment opportunity is bound to increase your profits. However, it comes with immense risk. Considering anything can happen, your financial future should not be at the mercy of one investment avenue. You should invest in many markets to reduce risk in case one market crashes.
Incorporate the above strategies when investing and watch your exposure to risk decrease drastically. Many people expose themselves to investments risks by being financially illiterate. Many people also land into investment problems because they fail to start small, take insurance, focus on organic growth and diversify. It’s also advisable to consider reinvesting profits before you take out an investment loan.