How to Mitigate Investment Risk

Few can deny that some form of investment is a good option for those who have money that they aren’t currently using.  Everyone knows that leaving it with a bank can yield a small, reliable and regular rate of interest, but for others, this simply isn’t good enough.  Other methods of investment, such as real estate, business ventures, stocks and shares, commodities and forex are all increasingly popular because they can have a far better ROI than banks offer.  What they all have in common however, is that they are inherently riskier.  Investors can (and do) lose large sums of money, so if you’re thinking about getting involved, then you’ll want to mitigate this risk as much as you can.

Don’t Risk What You Can’t Afford

The first thing to think about is your fund itself.  Just because you’ve got money that you can invest, doesn’t mean that you should.  Ideally, it should be money that you can afford to lose, just in case the worst happens.  Even the most seemingly reliable investments carry risk.  Ideally, you should have no debts and have an emergency fund before you start.  There’s no point paying interest on something, while trying to make interest of your own.  In short, the first step in mitigating risk is ensuring that the worst-case scenario isn’t likely to be disastrous.

Golden Guy Balancing Risk by lumaxart, on Flickr.  This work is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.

Do Your Research

The second, and possibly the most important thing, is to do your research before you even think about putting your hard earned cash anywhere.  It takes a lot of work, but it’s worth it in the end.  Even if you’re handing over a fund to an investment company, you still need to get all the background information you can, and should go through all of the details and risks first.  Never put your money into an industry that you don’t fully understand.

Monitor Your Investment

Monitoring your money is also of critical importance.  You should not simply leave your money invested without regularly checking to see how it’s doing.  If you’re trading foreign currencies for instance, you’ll want to be constantly updated with how your fund is doing, as things can change minute by minute.  There are also a host of different tools and orders that you can use to ensure that you are preventing huge market fluctuations from damaging your capital.  This page is quite handy for more information on things such as stop loss orders.

Leading on from the last point, you should make sure that the level of risk hasn’t changed since you began your investment.  If it has, it may be wiser to change strategy, and put your money somewhere else.

Spread the Risk

The final thing to think about is having a portfolio, which is what all major investors do.  Essentially, this means not putting all of your eggs in a single basket.  The more spread out your money is, the less likely you are to suffer when one of your opportunities turns south.  The best investors will have a spread of investments over a variety of different sectors.  Some will be more secure than others, and some will be high risk, but high reward.  Beware of supposed ‘safe havens’ such as gold; they can and do fluctuate, even if they’re resistant to crashes.

To conclude, you can never truly eliminate risk when you’re investing money, but you can reduce its impact and the likelihood of something going wrong.  Don’t risk more than you can afford, do your research before taking an opportunity, keep an eye on how your money is doing, and if possible, spread your investment over several industries or products.