You might be worried about locked up funds, may be a financial institution you invested in closed down or yet still the caretaker of your side business bolted with your money. If you are anxious about these and more, then I invite you to read on. You will know why it is that funds get locked up and how to make money in future without locking up your funds.
Anytime you put your money into government bonds, treasuries, stocks, cash etc., you expose yourself to a certain degree of probable loss of capital and also potential for gains. In a previous article, we discussed the various sources of risks involved in investing in financial assets. Knowing the risks, how does one go about minimizing the impact on finances should the risks manifest? Below are a few risk mitigation techniques to aid you in your investment journey:
I. Avoid borrowing to invest (leverage)
Many people borrow to invest so as to maximize gains. They either borrow from banks, friends, their employer or actually borrow shares to sell and replace them later (margin trading). Those investors usually borrow more than they can afford, to buy shares, speculating on the rising stock prices on the exchange. When this happens, a temporary fall in stock prices will lead such investors to sell quickly to repay loans thereby abandoning potential opportunities for future gain.
Spread your investments into different asset classes. For small investors, investment schemes like Axis Pension Plan and mutual funds provide this diversification for you. The principle of diversification ensures that when one investment does not perform well, the others do well to make up for any losses.
III. Invest Consistently
Investors who invest small amounts at regular intervals e.g. monthly or weekly do better than those who try to time the market. Sometimes you will buy at high prices and other times low prices, but in all cases a large portion of your savings is not invested at expensive times. We call this Cedi Cost Averaging.
IV. Keep a Long-term Horizon
Investors who invest for the long-term generate better returns than short term investors. This is because long-term investors have enough time to wait for the market to correct after prices fall than short term investors. Economies and markets don’t stay high or low continuously, they go in cycles of high years and low times. But in the long term (5-10 years), they usually go in upward trends. An investor with long term horizon is not pressured to sell during low market period and thereby avoid booking permanent losses.
V. Set your Risk Tolerance Level
How much loss can you afford to take? What kind of risks keep you awake at night? How much risk are you willing to take on?
Individuals willingness to assume risk and also potential for higher gains differ from person to person. Risk tolerance is influenced by a combination of factors, some of which are listed below. Finding answers to the above questions is part of the process we refer to as determining your risk tolerance.
Risk tolerance is influenced by a combination of factors and knowing your risk tolerance will guide you in the investment opportunities you explore. It is important that investors apply the above mitigation measures in order to avoid exposing themselves to undesirable losses. Speaking to a financial advisor will help you assess your tolerance level as well as how to apply these mitigation strategies