How To Avoid Risk When Investing

When considering your investments, you may well be looking for ones that involve no risk. However, there is a slight risk in all investments so it’s about choosing a strategy that minimises your exposure to risk while still leaving yourself with a chance of a decent return. In order to do this, there are a few simple steps you can take, from checking out company house before investing in stock, to diversifying slightly to give yourself a better chance of a decent return.

Can you avoid risk altogether?

One thing you can try to do is avoid risk altogether. This involves only investing in guaranteed return products such as bonds that will pay out a pre-determined sum on maturity. However, even these no-risk investments are not protected when it comes to inflation so you could find that although the value of your investment has grown, if it’s increased at a rate lower than inflation then you’ve effectively lost money by trying to avoid that very outcome.

Knowledge is power

The great British newspaper owner C P Scott famously said that “Comment is free, but facts are sacred” and nowhere is this more relevant than when investing in company shares. You can read and pay for any number of opinions in newspapers and online but to really understand a company then it pays to search their records at depositories such as company house, which can be searched for free via services such as Duedil. Here you’ll find useful company data including their annual returns and details of their management. As companies are legally bound to file certain documents on time, if anything is missing then this should immediately ring an alarm bell and suggest that the company in question could be a riskier investment than you are in the stock market for.

A safer kind of share

If you do choose to invest in a company, it’s worth checking out higher quality and preferred shares. In exchange for giving up your voting rights, holding these shares means that you are the priority when it comes to receiving dividends and also getting your money back should the company go out of business, which should come as some comfort to the risk-averse investor.

Insure yourself against risk

You can also choose to effectively insure yourself against risk by investing in something like a segregated fund. These are operated by insurance companies and offer the chance to invest in shares that are pre-approved by the insurance company and mean that you are guaranteed a return when the fund matures. However, there will be penalties for selling before maturity and, as such, your money is tied up, meaning you may not be able to take advantage of better investment opportunities if they come along in the meantime.

Diversify

Putting all your eggs in one basket, even if it looks like a very secure basket, is still a risk. The safest bonds in the country still carry a slight risk, albeit it is unlikely that any stable government is going to go bust. However, as result, these bonds will again offer the lowest returns that possibly lose out to inflation. Therefore, in the current low-interest economy, a portfolio this is slightly diverse may offer a better return for a little bit more risk – any investment that performs well will hopefully counter any low-return products.

Risk is inherent in all investment but with a bit of thought, some intelligent choices and a full understanding of what you are buying into, it can be limited without getting into the position of accepting miserly returns.

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