The lure of high returns is often louder in the world of finance, especially when investing in stocks or cryptocurrency. Even so, savvier investors recognize the thin line between devastating losses and long-term success and that’s why they pay more attention to risk mitigation. This article focuses on the most effective strategies to manage your investment risks.
Perform Investment Valuation and Risk Analysis
The best starting point for making sound investment decisions is to get the estimated intrinsic value of stocks versus their current price. You can use reputable platforms like Alpha Spread to get automatic intrinsic valuation of stocks, which can help you tell where investment opportunities and risks lie.
You can also use a software program to highlight how your current portfolio as an investor measures up to a specified risk score. It can further help you determine how your investment portfolio can perform during a downturn.
Reevaluate Asset Allocation and Portfolio Diversification
The approach here is to divide your money across many asset classes to minimize disaster in a downturn. In this case, if one stock fails, you can still redeem yourself with the options in the classes.
You can run multiple mutual funds in various styles, such as small-cap, mid-cap, and large-cap, as well as invest in international stocks and bonds. If you are nearing retirement, think about setting up a fund that produces income securities. Investment is not limited to bonds and stocks. You can also diversify further into commodities, exchange-traded funds, and real estate investment trusts (REITs).
Minimize Portfolio Volatility
One way to lower your portfolio volatility is to allocate some percentage to cash or its equivalents. This way, you will not need to sell other assets and incur losses when the market is down. Your goals and timeline as an investor will determine the exact amount to hold in cash.
Another way is portfolio rebalancing. Upon analyzing the losses and returns of various assets based on market movements, you can let go of those investments that might have already appreciated in value and focus on acquiring the ones declining in value. Consider substituting high beta stocks with those with lower beta names to shield yourself from market fluctuations.
Employ Hedging
A hedge is an investment risk strategy that focuses on safeguarding your portfolio against risk. While hedging may not be able to get rid of the risk completely, it can help lower losses in the event of rising market volatility or increasing inflation that threatens to reduce your purchasing power.
For instance, if you hold a notable position in a stock, you can purchase put options to shield yourself against a decrease in the stock’s price. With put options, you have the right to sell a stock at a given price to limit possible losses.
Establish a Margin of Safety
If you are a value investor, you can initiate your margin of safety by choosing to buy a stock if it has a prevailing market price that is below its perceived intrinsic value. By setting a higher margin of safety, you reduce the downside risk and increase your chances for solid returns. For instance, if your margin of safety is 20%, you can be attracted to a stock with $80 or less price per share and an estimated intrinsic value of about $100 a share.
Every investment has its fair share of risks and opportunities that you can’t afford to ignore. The best thing to do is to weigh your individual risk tolerance and settle on a risk management measure that works best.
