As an investor with enough experience, you probably have a working idea of how investing somehow works. You now also know that investing involves risks and that some investments may have greater risks compared to others. Beyond comprehending the essentials, the main goal you should aim for in improving your investing awareness is how to safeguard yourself from risky investments. As a vital link, therefore, in building a viable investment portfolio, study these five steps for avoiding investments which are considered very risky.
1. Evaluate the investment risks and returns.
Simply said, investing in stocks and bonds will lead to loss of your money if the prices of these funds go down. The risk is part and parcel of investing; hence, the need to assess the rate at which your portfolio will grow or decline based on the investment you make. Getting a complete picture of the future performance will help you decide the viability of investing in either stocks, bonds, or in both. It goes without saying that there is still the possibility of losing money when you do invest; however, arming yourself with the clear picture of the risks involved will aid you in managing your portfolio well.
2. Study how to evaluate investment risks.
Being an investor, you must teach yourself how to evaluate to gage investment risks. Do this by observing the percentage at which your portfolio’s value decreases. First, find out the beginning and final value of your investments and compute the difference of the two. You can then divide that difference by the beginning value of your investment to derive the percentage. Based on the final figure, you can decide the potential or lack of potential of any investment.
3. Beware of investment scams.
You probably read about the time when Wall Street urged people to invest in risky oil and gas products. And since many investors in the past had amassed wealth by investing in oil and gas, many frustrated investors in the volatile stock market chose to buy in, hoping to cash in likewise only to realize that they have been duped. The lesson is simple: Do diligent research work to avoid jumping blind into such dubious schemes.
4. Get to know other types of investment risks.
There are many dimensions to the apparently simple idea of risk. There is systematic risk (market risk) as well as unsystematic risk (company-specific risk). The first occurs when a natural disaster or cyclical recession occurs, which makes this type of risk beyond anyone’s control. Company-specific risks only affect a particular company, not the whole market. Avoid encountering this risk by having a portfolio which is diversified.
5. Build a diversified portfolio.
Inevitably, your investments will decrease in value at one time or another. If you are not up to such an unpredictable game, settle for cash savings or government bonds. That is, if you are satisfied with small benefits. Stocks and bonds can provide bigger returns although they involve greater risks in turn. Nevertheless, you can reduce the hazard of price volatility of investing in bonds and stocks by choosing an assortment of bonds and stocks to invest in. This is what diversification means. It protects your money by balancing out the risks over several investments.
It takes great patience and diligence to enhance your investment portfolio’s potential to build wealth for you. It may seem like a game of luck to you; however, by doing your share in understanding the various factors that affect your investment, you can reduce the risks and safeguard yourself from risky investments. Remember, the most valuable asset you must protect against risks is your own well-being.