How to Manage Investment Risk

You may be asking the question, “How do I determine the difference between an okay and a foolish investment risk?” While there is no established set of steps for the perfect investment strategy, there are many ways to ensure you assume an adequate degree of risk. Here are five strategies you can apply to help make your investment decisions:

1. Diversify

Most types of risk can be managed by diversification—dividing investment dollars among different industries, countries, and asset classes (stocks, bonds, real estate, etc.). “Spreading the risk” through diversification helps cushion the impact problems from an investment might have on a portfolio. Mutual Funds are a popular investment vehicle, partly because they enable investors to instantly diversify.

2. Be Patient

Invest for the long term to reduce risk. Very high stock-market returns occur only over short periods. On the other hand, losses disappear almost completely over ten-year holding periods, and they vanish over a twenty-year time frame.

3. Jump in Gradually

Lump-sum investing can produce spectacular returns if your timing is right. That’s a big “if.” Very few professional investors consistently “time” the market correctly, and individual investors are notorious for timing it incorrectly, buying at market tops and selling at market bottoms. For most investors, dollar-cost averaging—investing a fixed amount of money on a monthly basis—provides a disciplined approach which can reduce investment risks and improve long-term returns.

4. Monitor Your Motives

If your motive for taking a risk to multiply your assets is based upon greed, it’s wrong! It’s never wise to risk your savings on the possibility of earning more when you already have plenty. Pray and ask the Lord for direction and a “peace” before launching out, rather than asking Him to bless an unsure move after the fact.

5. Seek Wise Counsel

If you don’t obtain counsel from one or more investment counselors who have more wisdom and experience than you before making a questionable investment, you may be in for a rude awakening.

 

Excerpt adapted from Financial Freedom: More Than Being Debt-Free by Patrick L. Clements.