Smart investing involves risk management; However, most people focus on how much money they can earn without looking for strategic risk analysis. It is important for an investor to fully understand the concept of risk before starting an investment plan and to implement certain security measures to ensure that its success rate is increased.
From an investment perspective, the risk is related to the end of the period value of the investment, and the main concern of an investor is an impairment of the amount originally invested. There is no way to completely eliminate financial risks, even when placing assets in a bank account. For this reason, a strategic investment plan should include risk mitigation techniques that are proven to provide a greater opportunity for the future.
The most commonly used risk mitigation techniques in managing investment risks are diversification, dollar cost averaging and time. To better understand these areas, we will explain their meaning and implementation.
Diversification in finance mixes a variety of investments within a portfolio and may include investments in different markets, regions or countries. Diversification is a common practice among investment managers to reduce risk without significantly reducing returns.
Dollar Cost Averaging
Dollar Cost Averaging is a timing strategy that regularly and periodically invests amounts of the same amount over specific periods of time. This is a technique that prevents investors from putting all their money on the market at an inappropriate time.
Time as a risk moderator
Time not only works through the power of compounding for investors, but also reduces the risk of investment. If we look at the main markets, we will see that the stock market will normally follow an uptrend with intermittent fluctuations. By focusing long-term on strategies, many of these fluctuations can be smoothed out compared to the overall performance as the recovery occurs and markets often outperform a previous high. It should be noted that there is no specific formula for the time as a risk moderator and indefinite waiting times could be considered in the implementation.
For any investor, the primary step in formulating a successful strategy should be the determination of an investment objective. Although “earning money” can be a fair representation of your goal, it does not focus on the strategic process that needs to take place to achieve what we originally intended. The investment objective must be realistic and specific, taking into account the risk tolerance, personal needs and circumstances and any restrictions on the investor.
It is recommended that every prospective investor conduct an analysis of financial needs. Many companies are available to help out and provide the direction and equipment needed for a correct analysis, and most should do this important service for free. It is also important that any company that supports a potential investor in its strategy should describe in more detail these risk mitigation techniques and explain how they can be integrated into an investment plan.