Are you thinking of investing in the stock market but are worried about the risk in today’s economy? Although you can’t completely avoid stock market risk, there are ways to mitigate it.
Market risk, also called systematic risk, arises from the uncertainties affecting today’s financial markets that could result in losses. Changes to interest rates and exchange rates as well as geopolitical events and economic downturns are some of the factors that affect market risk.
If you want to know how to get the most out of your investments in today’s financial climate, we have the answers.
Here’s a guide to four top strategies to mitigate risk.
1. Understand Your Risk Tolerance
Risk tolerance is an investor’s ability to endure risking the capital they invest. The potential risks vary depending on the investor’s age and current financial situation.
For example, if you’re in your twenties, unmarried, and have few financial responsibilities, you’re more risk-tolerant than an older investor with college-aged children and multiple financial obligations.
Generally, younger investors can take bigger trading risks than older investors. Investing early in life allows you to create an investment portfolio focused on wealth creation.
Taking financial risks can reap big rewards, but it’s not recommended for older retirees who need to focus on wealth preservation. Knowing your risk tolerance allows you to make investments with the best risk-return value for your financial future.
2. Keep Enough Liquidity in Your Portfolio
A financial emergency can strike at any time. You may need to redeem your investments at some point, even when the markets are down.
You can reduce the financial risk by maintaining adequate liquidity. Liquid assets offer security that allows your existing investments to continue without interruption to deliver long-term results.
Rather than draining your investments, you can benefit from periodic market corrections. Be sure to set aside an emergency fund that is equal to six to eight months’ worth of expenses.
3. Create an Asset Allocation Strategy
Investing in only one asset can be risky. Asset allocation refers to expanding your investments to more than a single asset class.
Consider investing in a mix of asset classes such as equity, real estate, mutual funds, gold, etc. One stock risk management strategy is to invest in assets that are inversely correlated.
For example, equity and gold are considered inversely correlated assets. When one outperforms, the other underperforms.
4. Hedge Your Investments
Hedging allows you to minimize potential losses when a stock’s value falls. You accomplish this by purchasing an option.
This allows you to sell the stock at a certain price when its value starts to dip. You may not see big returns with this strategy as you would otherwise.
This strategy appeals to investors who don’t want to take unnecessary risks with their investments.
Effective Risk Management Techniques
Although every investment carries some risk, it’s possible to mitigate the stock market risk with the right risk management techniques.
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