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It's impossible to go your whole life without making mistakes.
Even the most adept investors have gotten in on a promising investment only to have some unforeseeable circumstance to bring everything crashing down.
When it comes to matters of money, we have a tendency to underestimate risk and overestimate rewards can be curtailed by appropriate risk management. By understanding risk management, you can help your portfolio recover even after taking a big hit, should something like that ever occur.
In this post we will go over some of the things you can do to prevent financial ruin in the future. With proper risk management, you can see overall sustained growth and work to limit risk downside.
Remember, as always, that there is no such thing as a riskless investment.
As investors we are always looking to limit risk and maximize gains but there is no way to eliminate investing risk altogether.
Diversify Your Portfolio
It is undoubtedly trite to say you shouldn’t put all your eggs in one basket, but it's tried and true investment advice.
One of the first ways you can mitigate risk as an investor is to spread your investments out over several different asset classes.
The basic theory behind diversification is avoiding the risks associated with going all-in on one asset class by spreading out your investments over several assets.
For example, if you are all-in on stocks, you are guaranteed to lose money if there is a crash. However, if you also had real estate in your portfolio, which is usually more resistant to volatility than stocks, some of your assets are protected.
Don't Just Diversify By Asset Class
It isn’t enough for me to say my portfolio is diversified because I have some real estate and a bunch of stocks.
Which type of stock do you own? Are they concentrated in a single industry or are they spread out among numerous industries?
When it comes to real estate, are you invested in residential real estate or commercial?
You could make a direct purchase of a commercial property if you have the capital. Alternatively, you can go through a commercial real estate private equity firm or real estate investment trust (REIT), which not only spreads out risk, but also requires considerably less capital to get started.
If you don’t have the time or resources to devote to learning the industry specifics, such as NOI or cap rates for commercial real estate, then it makes way more sense and involves way less risk to invest through a trust or private equity firm.
Never Invest More Than You Can Afford
Lastly, it's important to state that you should only be investing with expendable income.
And no, your savings doesn't constitute expendable income.
Ditto for emergency funds.
Think of it this way - you should only be investing money that you could potentially afford to lose should the worst come to pass.
Dollar-Cost Average In
The old adage goes “it’s not timing the market, but rather time in the market.”
Therefore, when investing in volatile assets like stocks or cryptocurrency, it's best not to try to time the bottom of a crash. Instead, it's more effective to dollar cost average your cost basis making regular purchases of fixed amounts with less focus on the cost of an equity.
Using this approach you are averaging out price swings while growing your investments and keeping your cost basis manageable.
Most Importantly, Learn From Your Mistakes
If you’ve taken a big financial hit recently, then now is the perfect time to learn about proper risk management strategies.
No one likes learning expensive lessons, but consider this - if you suffer a financial loss and don't learn anything from it that's an even bigger loss!
After all, a person who doesn't learn from history is destined to repeat it!
Veronica Baxter is a writer, blogger, legal assistant, and entrepreneur operating out of the greater Philadelphia area. She writes for the Law Offices of David M. Offen, a group of successful bankruptcy lawyers in Philadelphia.