In today’s post we discuss four simple ways to avoid investment risk. If you are an investor you need to read this.
There appears to be no such thing as a risk-free investment given today’s volatile market environment. The issue of avoiding risk can be stripped down to four basic investment fundamentals though there is a wealth of quality investment advice available from investing sites such as Motley Fool or the finance sections of broadsheet papers.
These simple fundamentals should allow you to invest as securely as possible using the market risk management tools from SunGard APT (http://www.sungard.com/apt).
Diversifying investment could ensure the risk is spread. The easiest way to do this is to invest in a mutual fund or an index fund. A mutual fund is a collection of investments that is actively managed by a fund manager. An index fund is similar and runs automatically by mirroring an index such as the NASDAQ. Investing in any one of these financial instruments could result in instant diversification.
Investing in uncorrelated markets could be another way of reducing investment risk. It means that if one market is in a decline, the other may be experiencing growth. So, whilst the stock market may be dropping, the bond market may be rising. Or the US market may crash whilst the Indian market fires on all cylinders. Avoiding favorites could help balance investment portfolio.
Don’t believe the hype
Staying clear of all new issues could help. A new issue comes to market when it is a good time for the company or its insiders to sell, but it does not follow that this is a good time to buy. It is important to disassociate from the hype and look at things from a broader angle.
All new issues are accompanied by a marketing push but beneath the hype is the fact that these stocks have never had a chance to reveal any hidden risks that may be lurking. A discerning investor should avoid new issues until they have survived at least one recession as that should be enough time for any hidden risk to surface.
Don’t follow leaders
It is important to beware of the ‘lemming effect’ even though it may seem that the most sensible investment strategy is to buy what is popular. It is best to steer clear of too many stocks that are universally recommended by brokers or are the latest financial media darlings. These stocks may remain popular for years but there is the risk of investing in them just as they reach their peak. Their fall from grace is often dramatic and sudden with astounding drop in returns.