It would be great if we had a fail-proof way of reducing risk in our stock investment portfolio, right? Unfortunately, all investments have a certain degree of risk attached. When it comes to investing in CFD stock, the risk is almost inevitable. It’s a rule of thumb; with greater risk comes greater reward. But for many traders, it’s not that important to make profits rather, it is important to reduce risk.
This is how it goes…
When you invest and hold onto your stocks, you are more likely to earn a profit in the long-run. But when the market starts fluctuating, we are often tempted to react. We have the fear of losing our investments. This is exactly why lots of traders end up selling. If that’s your approach, too, you may not ever reach your long-term financial goals.
What is it that you can do to avoid common mistakes like these? How can you reduce the risk associated with your stocks? Follow these tips to stay out of trouble:
#1: Diversify Your Portfolio
This is the first tip any trader would ever give you. Diversification is the process of selecting a variety of investments in different asset classes to reduce risk. This keeps your portfolio from the impact of market swings.
If you are just putting all your money in one company’s stock, you are making a huge mistake. If somehow the market hits this stock, you will end up losing your entire investment. On the other hand, if you buy stocks from different companies across different industries, you are spreading your risk. The return on one failing investment will compensate for the return on another rising investment. It wouldn’t affect your profit potential much.
#2: Use Dollar Cost Averaging
Dollar cost averaging is a great strategy to smoothen out the impact of market fluctuation on your portfolio. It lets you apply a specific amount of money on purchasing a stock, bond or mutual funds. It helps you buy shares when the prices are low instead of buying them when the prices are high. As a result, over the course of time, the average cost of your shares will be lower than the average price of these shares. This strategy will keep you from making emotional decisions.
#3: Pick Bonds
This is a common and recommended method of reducing investment risk. It provides you access to stable and visible cash flow. They are a form of short-term investment. You will get the coupon rate promised whether or not the business performs well. Bonds are a risky investment in case you don’t know what you are investing in. Therefore, evaluate your options and invest wisely.
#4: Buy REITs
Buying stocks along can be risky even if they belong to different industries. So why not diversify your equities by investing in REITs (Real Estate Investment Trusts). They are also traded like stock exchanges. They are basically companies that invest in real estate or related services. As you buy them, you indirectly invest in real estate. There is no need to learn the fundamentals of flipping houses for it.
Keep in mind the real estate market has nothing to do with the stock market. It rarely happens that the real estate market and stock market crash at the same time. By investing in REITs, you are adding a layer of diversification in your investment portfolio.
#5: Reinvest the Profits
You must be thinking how can this strategy reduce risk? Let me explain that. Most investors plan to save the dividends received on their investments. If you do that, you will have to suffer at the hands of inflation. When you reach your retirement age, will that money be enough to meet your lifestyle? Not really, right? So why not reinvest those funds? Along with investing the profits, it will also keep you from spending that money, too.
#6: Go International
The European markets are cheaper as compared to US markets. Plus, the earrings potentials have started to pick the pace, too. Instead of just sticking to the domestic market, spread your wings and go international. This requires a lot of research but it’s a worthy initiative to spread your risk.
#7: Don’t Hesitate Hiring a Professional
Sometimes, you can only do such much as an investor. Apart from following the risk-reducing strategies, never hesitate to seek out professional help. It is always useful to spend an hour or so with a financial expert. Their suggestions, feedback, and ideas will let you know if you are on the right course or not. Financial planners usually try selling a service package. Avoid that and simply set an hour-long meeting, to begin with. If you want advice on what to invest in, then you need an investment advisor’s help.
The waves from the stock market can rock your financial boat and cause it to skink if you don’t use these strategies. Although they don’t guarantee to keep you risk-free, they can reduce its impact for sure. If you use some other strategies for reducing risk in online trading, feel free to share them in the comments section below.