With the stock market giving stellar returns for the last few decades, if you aren’t an investor yet, you should make an effort to start investing. But, keep in mind that in stock markets greater the risks you take, usually the more significant returns you’ll enjoy. Risk management in the stock market is the process of investors identifying and assessing the risk and then taking steps to develop strategies to manage the risk and maximizing their returns. Let’s look at how to manage risks when investing in the stock market.
1) Investing for the long term
Historical research of stock markets shows that investors who invest for the long term reduce their investment risk. The reason for this is that even though a particular investment may fall or rise within short periods, it will usually gain in the long term. Typically, you should consider investing in the stock market for long periods such as five, ten, twenty years, or even longer. Ridgewood Investments can help you get exceptional long-term investment performance with their long-term focus.
2) Diversification helps manage risks
Investors should have well-balanced investment portfolios with their investments spread over different asset classes. You can choose to invest in bonds, stocks, or real estate as a means of diversification. The advantage of diversification is that it helps you manage risks since even if your investment in one asset class falters, your investment in other asset classes will typically gain. When it comes to stocks, you can diversify by spreading your investments across disparate industry sectors. For example, opting to invest in stocks of healthcare and technology, which are entirely different industries altogether.
3) Investing in a consistent manner with the help of Dollar-Cost Averaging
Even the most seasoned investors are unable to time the market, that is, buy shares when the stock market is going down. In such a scenario, you should invest in a consistent manner with the help of Dollar-Cost Averaging. This is nothing but investing a specific amount regularly, for example, investing $100 each month in a certain company’s stock.
What happens is that the stock value may fluctuate every month depending on multiple factors. As a result, you may be able to buy two shares for $100 in one month and only one share in the next month. Sometimes you may buy when the stock value is high, and other times you may buy when the stock value is low. However, since stock markets usually rise over time, you’ll usually do well in the long term.
4) Risk levels change with age
A younger investor can afford to take higher levels of risk than an older investor. The reason is that a younger investor has more time to recover from market declines. For example, if you are a few years away from retirement, you shouldn’t take high-risk investment decisions that may adversely impact your nest egg if the stock market crashes. At the same time, taking an approach that is too conservative may result in you not meeting your financial goals.
5) Monitor the performance of your investment portfolio periodically
As an investor, you should do periodic reviews of your investment portfolio to see how it is performing. Ideally, you should review your portfolio on an annual or semi-annual basis. While reviewing your portfolio, weed out any investments that are performing poorly over the long term. You can also book profits for some investments that may have done exceptionally well.
In Summary
All investments come with some amount of risk. You cannot create an investment portfolio that has zero risk, yet gives you high returns and helps you meet your financial objectives. Implementing the tips we’ve shared in this article will help you balance risk and returns and ensure that your investments grow over time.