About 61% of United States adults today say that they own shares of stocks. The stock market is a wide-open outlet for people looking to grow their wealth by owning shares of a publicly traded company. People today are also choosing to invest in cutting-edge investments like cryptocurrency and non-fungible tokens (NFT).
Regardless of what you like to invest in, it’s incredibly important that you develop strategies that will help you get where you’re trying to go. To do this, you must be comfortable managing risk.
The points below will help you dive into some risk management strategies that will make a difference in your wealth-building and financial goals.
The Importance of Risk Management in Investing
So, why is risk management so important in investing? Every investor has their own risk tolerance, but it’s always vital that you learn the ins and outs of managing risk so that you’re well-prepared.
Following some risk management strategies can help you achieve the following:
It Takes the Stress Out of Investing
When you’re investing in any market, there’s always a level of stress that comes with the territory. By managing your risk, you’ll be in a better position to stay stress-free while you invest.
This way, you’ll be in a better position to manage your portfolio without feeling overwhelmed. Having this peace of mind makes it easier for you to get the desired outcomes you’re seeking, and you’ll feel less hesitant to make a move.
You’ll Make Better Decisions
When you’re focused on managing your risks, you’re also more likely to make better investment decisions as a whole. Studying risk teaches you about the market and the ways that you can optimize your earnings.
Having to consistently manage your risks will help you become a better assessor of the market and all of the variables in play. It teaches you to always study what’s in front of you, and ways that you can maximize value with each investment decision.
Risk Management Can Help Avoid Crises
If you’re an investor, risk comes with the territory — but it doesn’t mean that you need to encounter full-fledged crises. A solid risk management strategy will minimize your losses so that you don’t lose your entire position.
You’ll be able to reduce your exposure to different hazards that can be detrimental to your portfolio.
So, what are some of the best risk management strategies you should follow?
Diversify Your Portfolio
When in doubt, diversify. Many investors today focus on portfolio diversification as their main risk management strategy. Diversification is the foundation of risk management and will help you build your portfolio in a way that serves you.
It will allow you to account for the fact that there will always be dips in the market. When you spread your investment out into multiple interests, you’ll have a better opportunity to minimize the losses that your entire portfolio takes. There are several ways that you can diversify.
For one, consider investing in exchange-traded funds (ETFs) in addition to individual stocks. With ETFs, you are purchasing shares that represent entire sectors of a market, rather than simply investing in a single company.
For example, you could invest in ETFs related to energy, the tech sector, or the top companies in the S&P 500. These investments provide you with instant diversification that you can’t always count on.
Some other ways to diversify include mixing up your portfolio with different types of investments, such as crypto and real estate. Focus on diversification and you’ll always be in a position to mitigate risk.
Have a Plan for Inflation
Inflation is a hot-button issue and one that will always be a factor when you’re investing. Essentially, inflation happens with the cost of goods and services increases in relation to the value of the dollar.
Periods of inflation often ebb and flow with the economy as a form of corrective measures. It causes the value of the currency to decrease, which can cause investors to tighten their wallets and be more hesitant with their investments.
Mixing up your portfolio with diverse investments is one of the best ways to beat inflation. You might also choose to explore bonds, long-term savings accounts, and other stable investments that can help you weather the storm of inflation.
Factor in Liquidity
Liquidity is worth its weight in gold for an investor. Becoming more liquid is a core component of investing that will help you. Having access to cash will give you the chance to strike while the iron is hot whenever you find a deal worth jumping on.
Whether you’re a company or an individual investor, liquidity is always a signifier of financial health. Always set aside some money in your savings to make sure that you can allocate it as needed. This is a core part of risk management basics that will put you in the best position to make sound decisions.
Issues With Political Turbulence
Investments are also heavily affected and influenced by political situations. Changes in the law, sentiment, and conflict all affect the markets.
As an investor, you need to remain fully aware of the political climate. Stay attuned to news outlets from all over the world, making sure that you’re reading more than the business and finance pages.
Consider investing in other countries and markets, and remain aware of how political issues are affecting the value of the dollar and the state of the economy.
Market and Volatility Risk
Markets as a whole come with inherent risk and volatility. The stock market is one of the most volatile forms of investing, as shares can experience wide swings any time the markets open each day.
You can hedge against these risks with strategies that diversify your portfolio, in addition to investing in ETFs. This might also be a good time to invest in bonds, real estate, commodities, precious metals, or other such investments that might have less volatility at the time.
It’s also best to reach out to a financial advisor who can steer you in the right direction of any sort of position you’re trying to take. Managing the volatility of the markets will assist you when you’re trying to maximize your returns while minimizing your potential losses.
Stay on Track With Regulations
You also need to make sure that you are on the right side of law and policy when you’re investing. This requires you to stay on top of regulations and any changes that happen. Familiarize yourself with regulations and laws that pertain to your field of investing, and always stay in the loop when they are amended.
Otherwise, you can fall prey to fines, penalties, and other issues that stand in the way of you and your profits. This is arguably one of the most important aspects of risk management in investing and deserving of your full attention.
Factor in the 1 Percent Rule
In investing, many people choose to abide by the 1 Percent rule. This is a rule that is particularly popular with day traders. According to the 1 Percent rule, avoid putting any greater than 1% of your total capital into a single investment.
Putting this rule in place prevents you from putting all of your eggs in one basket, and gives you the best chance to diversify your portfolio. Some skilled and seasoned investors choose to go as high as 2% or 3%, but always consult a financial advisor before making such a change.
Focus on Supply Chain Issues
In 2023 and beyond, supply chain issues will make headlines. The supply chain took a serious hit in 2020 and has steadily dealt with problems ever since. This affects virtually every facet of the markets and is something that you’ll always need to keep your eye on moving forward.
When you recognize what’s happening with the supply chain, you can invest accordingly and recognize where the shortfalls are. This gives you the information that you need to plan ahead and hedge against potential risks and losses.
Handle These Risk Management Strategies
These points are helpful when you’re looking into risk management strategies that can help you in 2023 and beyond. When you really want to take your investing to the next level, consider getting the help of a professional that can steer you in the right direction.
Joshua M. Peck can assist you with your financial and investing needs. If you’d like to get in touch for service or questions, contact us on our site for more information.