Investing your funds can be a great way to increase your capital and generate income, but no investment opportunity comes without risk. Learning to manage risk is a critical element of successful investing, regardless of whether you’re a professional trader or you’re preparing for your future.
Of course, the level of risk you’re willing to take may depend on various factors, such as your age, financial stability, and long-term goals. To learn more, take a look at these risk management strategies that are popular amongst younger investors:
Rely on Trends
When you buy stocks that are performing well, they’re on an ‘uptrend’. Providing they continue to increase in value following your purchase, you’ll generate a profit. However, relying on uptrends as an investment strategy means knowing when to sell your shares and getting out before the crash happens. Mapping a trendline will enable you to see when stock performance begins to falter. At this point, you can sell your shares and retain your profit, without letting the risk increase.
Use Position Sizing
If you’re going to invest in high-risk opportunities, consider how much you’re willing to put into them. Sure, potential returns may be high, but the risk of losses is high too, so why put all your eggs in one basket? Position sizing simply refers to proportioning your investments so that the risk is shared. You might use 20% of your funds in a high-risk investment, for example, but put 80% in a low-risk investment opportunity.
Diversify Your Portfolio
Diversification is a strategy that’s used by a wide variety of investors and it could be a viable way to approach your portfolio, if you want to manage risk and reap the most rewards, too. When you invest in different opportunities or commodities that react differently to external market events, you reduce your overall risk and diversify your portfolio.
However, diversification is only truly effective if the things you’re investing in are uncorrelated. When the stock market plummets, for example, the price of gold typically increases or remains stable, which indicates that these two investment vehicles are uncorrelated. By investing in both, you can ensure that your portfolio consists of investments that will respond differently to external changes, thus protecting your capital.
Learning How to Invest
As you can see, there are many different investment strategies to consider and numerous different investment opportunities that you might want to pursue. To increase your chances of success, however, it’s vital to take the time to learn more about the industry. When you follow statistical analysis from experienced industry leaders, like Barr Rosenberg, for example, you can begin to understand what factors professionals take into account. As a result, you’ll be able to make more informed decisions and enjoy better outcomes.
Of course, it’s always worth getting professional advice before making any major financial decisions. When you hire an investment manager or work with a financial adviser, for example, you can access all the information you need and balance the level of risk you’re willing to take.