The Risk-Wise Investor: How to Better Understand and Manage Risk

By Staff Reporter - 2 January 2020

Expert Voices

At times, investing can be difficult and watching the returns on your portfolio can bring a lot of stress. The day to day changes in the value of your investment occur from something called volatility. Thankfully, there are some ways you can manage the amount of volatility in your portfolio and they are not too complicated to understand.

 

If you want to invest like a pro and mitigate your risks while investing, take a look at some of the tips used by investment professionals.

Dollar Cost Averaging 

One way investors mitigate risk is by dollar cost averaging. Dollar cost averaging is when an investor purchases shares in smaller increments over a longer period of time as opposed to purchasing a large amount of shares in a shorter period of time. Using dollar cost averaging is a way to manage risks associated with volatility in the markets. If you use a lot of money to purchase a stock and the stock price goes down, you could be left holding the bag. The less risky way to purchase shares of stock is by dollar cost averaging. With this method you make smaller purchases more frequently. This way you will be purchasing the stock when it is both at its highs and its lows. This will help smooth your returns over time and you will experience less volatility in your investments. 

Pick Solid Investments 

One important thing to consider when purchasing stocks is that you want to purchase the stock of high quality companies. It is very risky to make speculative investments in companies that are not well established or not generating revenues. These investments include penny stocks and some of the smaller companies on trading exchanges. These stocks tend to be very volatile and the returns on your investment may not be as safe. Instead, you should invest in high quality companies that are well established as these investments tend to have less volatility and will also recover better during a bear market.  

Diversification

Another tool that investors use to mitigate risk is diversification. Diversification is when the investor purchases a bunch of different asset types. This ensures that the investor has exposure in every area of the market. Diversification is a smart move and it makes sense. You would not want to invest your entire portfolio in one stock hoping that it will double in price, because the chances are it will not.

 

If you put all your money into one stock, what would you do if your investment lost 50% or more? It would not be good. Instead, purchasing a handful of quality stocks and bonds will help protect you. It is also important to invest in different asset classes such as real estate, bonds, stocks, and fixed income. This will protect you when a specific class of assets suffers from a poor year because you can rely on good returns from the asset classes that had a strong year. 

Purchase Income Producing Assets that Appreciate

Putting your money into assets can be a great way to earn some extra money. Investors purchase assets hoping that they will either generate income or that the price of the underlying asset will appreciate in price. Some investments like real estate and companies with stock dividends offer both capital appreciation and recurring cash flows. These types of investments are great because they provide you with two ways of making money.  If you want to manage risk, Radar Logic can help you better understand and manage all opportunities and risks that comes your way. You need to understand the importance of multi value assets. Purchasing dividend paying stocks from high quality companies will allow you to receive income in the form of recurring dividend payments. Real estate investments work in a similar way because the underlying asset generally appreciates in price while providing you with monthly rental income. Purchasing these investments can help an investor manage their risk because these assets provide you with two sources of value. 

 

If you want to mitigate some of the risk in your portfolio, remember the tips I mentioned above. Managing your risk can be made a lot easier if you remember to invest how the professionals do. Investment professionals utilize dollar cost averaging to lower the risk of their investment. They also pick good long term investments instead of picking short term risky stocks. To further mitigate risk, you should use diversification and invest in various types of assets. Finally, you should invest some of your portfolio in assets that provide multiple streams of value like real estate and dividend paying shares of solid companies.

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