Money & Rights
Managing Risk When Investing Savings
Investing capital is an excellent way to make your money work for you, but if you are to enjoy benefits it is crucial that you take a sensible and measured approach. There are risks that accompany any type of investment and understanding those risks is the first step along the way to success.
The Bigger Picture
It may sound obvious but it is surprising how many people will invest their hard earned money without looking at the bigger picture. Good investing and the effective management of risk begins with in depth research and advice. An independent financial advisor may well be the best place to start, but the process should on going and regular reading around the subject and discussion with family and friends is important. If you are going to use some of your money to become an independent trader, then your research needs to be more extensive, you will need to learn all about the jargonused in the trading world and look at which markets would suit you best before studying how they work. As an independent trader you will also have to work out the best way for you to open and close positions on the stock market, many people now choose to use and online trading platform, however the more traditional method of employing a broker is still an option.
What Are the Risks?
An investment risk refers to the potential for an investor to lose money on an investment or not make as much money as they had hoped. Risk investment can be defined differently for different types of investment. Market risk, for example, is associated with trading on the stock market and the risk is, if the market in general is depreciating in value, then so may your investment. Another example is inflation risk which occurs when your investment portfolio is growing in value, but is not keeping up with the rate of inflation and so in real terms could be losing value.
Diversification
One sensible way to manage risk when investing savings is diversification and this basically means that you don’t put all your eggs into one basket. Spreading your capital across a range of investments can be a good way of avoiding too much risk, as it is unlikely that all of your investments will slow down in their appreciation or depreciate at the same time. Diversifying also means that you are able to have some money in low risk investments and some money in higher risk investments. As a general rule, the higher the risk, the bigger the potential gains and vice versa.
Investing in the Markets
It can be a mind-boggling process to research and assess what type of investment is best for you. A good place to start is by asking yourself what your investment goals are. For example you may want to slowly build capital over a long period of time, investments such as ISAs enable you to do this, you invest a lump sum for a fixed period and then do nothing until it comes to fruition. You may however also want to invest in something where you play a more active role in the investment and have the opportunity to make a profit over a very short period of time. Trading currency on the foreign exchange or Forexis a good example of this. Forex trading offers you a high chance of profit because you can quickly invest in a currency that is rising and get out quickly if it starts to fall. Also, because Forex has the highest volume of trade in the world, new investors are protected somewhat from sharp fluctuations in the market. Don’t forget that diversity is key and so a good balance of investment types is most likely to help you achieve your goals.
Hedging
Ever wondered where the saying “hedging your bets”comes from? Well it’s from the gambling culture, however, in investment terms it can make real sense. To hedge your bets means you take out some insurance. So, for example, if you invest in one particular market and you predict that it will rise in price, you then find a second investment that you predict will rise if your initial investment falls. The idea is that if you lose money on one investment, you will gain money on the other. Hedging is however can be quite a complex procedure and you would be well advised to take advice on it if you are not a particularly experienced trader.
When setting up an investment you also need to think about how you can get out of it. With a fixed term investment for example you may not be able to get out until of the term and if you can the likelihood is that there will be some kind of penalty charge for doing so. Effectively, your money is tied up and the reward for this will be relatively low. With investments where you can get in and out easily the exit strategy need to be different. To take the earlier example, if you have invested on the Forex market you should have a very disciplined strategy for when to exit. The best way to do this is to set up an automatic stop loss on your trading platform or with your broker. Setting up a stop loss means that if the price of a currency you hold is going down, there is a predetermined figure at with your position is closed and this way you won’t be tempted to leave the position open in the hope that the market will turn and you’ll head back into profit. Holding on to a bad investment for too long is a mistake.
And Finally
It is important to remember that all investments have risk attached and there are different ways to manage those risks. Knowing what the risks are and how best to minimise the risks is a sure fire way to maximising your profits across a broad, measured and sensible investment portfolio.
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