There is no such thing as a risk-free investment. However, there are a lot of ways for interested individuals to reduce the risk of their investments, with stock portfolios being no exception to this rule. When this reduction in risk is carried out in the right manner, the result can be much more reliable gains over time, thus making it very important indeed. Here are 10 methods that can be used to reduce risk in a stock portfolio:
1. Research Companies
There is nothing wrong with reading publications about which stocks to buy and which stocks to sell. However, interested individuals should never follow those instructions without looking into the relevant companies to understand why those recommendations are being made. Researching potential investments is critical because it provides interested individuals with an understanding of where the company is as well as where it is headed in the near future, thus enabling them to make better investment decisions than otherwise possible.
2. Numerous Companies
The simplest and most straightforward way to reduce risk is to spread out investments into more companies, asset classes, and investment types. Essentially, this would be an example of not putting all of one’s eggs into the same basket. For example you might consider having a mix of large cap, medium, and small stocks. You might also have some bonds in your portfolio. You can even spread out your stocks by industry, e.g. conglomerate, healthcare, tech, etc etc. You can also add some international stocks into the mix and even break those down by risk. For example, invest in Europe, China, India, Emerging Markets, etc etc. Do your research and find the best diversification plan for you. Stick with something simple. Don’t over think it. We’ll get into more detail below.
3. Consult Multiple Financial Advisers
Financial advisers can provide interested individuals some good advice about what kind of investment goal they should have in mind as well as what kinds of investments they should be making in light of their investment goal. However, it is best to consult multiple financial advisers for multiple perspectives, not least because that means being able to tap into more expertise and experience for useful information.
4. Diversify By Industry
Companies in the same industries tend to move in the same direction. For example, if there is less interest in gold, it makes sense that all gold mining companies will take a hit. To avoid being hammered by occurrences in a single industry, interested individuals should make sure to spread out their investments into multiple industries.
5. Diversify By Country
Speaking of which, those who are comfortable with foreign investments might want to spread out their investments into multiple countries as well. Please note that foreign investments come with a whole host of further complications, meaning that it isn’t something that people should get involved with on a whim.
6. Never Use Investment Strategies You Don’t Understand
Some investment strategies are simple but nonetheless effective. In contrast, others can be much more complicated. Unless investors understand exactly why an investment strategy is useful as well as under which circumstances it can prove useful, they should stay away from it.
7. Reevaluate Your Investments On a Regular Basis
Just because a stock was a good choice at one point in time, it doesn’t mean that it will remain so forever. As such, interested individuals will want to reevaluate their investments on a regular basis to make sure that their stock picks are still serving whatever financial goal that they have in mind. Otherwise, they could end up cluttering their stock portfolios with stocks that are either no longer helpful or genuinely detrimental to their financial goal.
8. Keep Your Emotions Under Control
It is very easy for people who get carried away by their emotions when they are investing. After all, there can be a lot of money involved in the investing process. Never mind how people will be urged to do one thing or another by a wide range of parties for a wide range of reasons. However, interested individuals should never let their emotions control their investment decision-making because that will cause them to make mistakes that a cooler state of mind could have picked up upon.
9. Learn from Your Mistakes
No one is a perfect investor, meaning that mistakes are bound to happen sooner or later. Great investors will examine their mistakes with care and consideration to figure out what went wrong so that they can prevent similar incidences from happening in the future.
10. Don’t Neglect Other Investments
There is incredible variation to be found within stocks, but at the end of the day, stocks are just one single kind of investment. As a result, while there is nothing wrong with interested individuals concentrating their investments in stocks, they shouldn’t neglect the potential of other investments, which can combine with their stocks to produce higher, more reliable gains than otherwise possible.