Saving cash isn’t enough. If you want to build substantial wealth and secure a comfortable retirement, you can’t rely on just that.
Inflation could eat up much of your nest egg and leave you with only a fraction of what you need. Instead, you have to develop an investment strategy that empowers you to grow your money over time.
The question is: How can you lower the risk while retaining most of the upside?
Six Ways to Lower Investing Risk
Lowering risk and still enjoying the benefits of healthy returns involves both art and science. Here are six salient steps you should take.
1. Do Your Own Research
The first is to do your own research and due diligence. Never assume that because someone else believes in an investment or recommends a specific opportunity that it will be appropriate for you.
Every person’s situation is different. You have to weigh your own circumstances and risk tolerance before proceeding.
2. Diversify Your Investments
Diversification is an absolute must with any investment strategy. This includes both macro and micro diversification.
Macro diversification refers to spreading your funds across various asset classes (stocks, bonds, real estate, crypto, etc.). Micro diversification entails an assortment of investments within an individual asset class (for example, selecting multiple index funds for your IRA, rather than putting everything in just one).
Good diversification reduces the odds of your entire portfolio collapsing when something goes wrong. Though it might limit some of your upside, it provides ample downside protection.
3. Take Advantage of Guaranteed Income
It’s always a good move to activate some guaranteed income streams as part of your investment strategy. A good fixed annuity is an example to consider.
With this type of investment, you get a guaranteed interest rate (regardless of what happens in the marketplace). Right now, that standard rate sits somewhere around three percent.
Pensions, Social Security, and certain forms of whole life insurance can also provide guaranteed income. It’s wise to look at using as many different options as you can.
4. Use Dollar-Cost Averaging
There’s a big ongoing debate among investors about whether it’s best to place a single lump sum immediately or to use dollar-cost averaging (DCA) over time.
DCA is a strategy in which you divide up the total amount you plan to invest and make periodic purchases of the target asset in order to reduce the impact volatility may have on the overall purchase. In other words, if you have $12,000 to invest in a fund this year, you invest $1,000 on the first day of each month, rather than investing all $12,000 on January
With DCA, you avoid the potential pitfall of investing the lump sum when the market is at a high point. This approach enables you to invest at different price floors and ceilings, which tend to average out and give you a better rate over time.
5. Only Speculate What You Can Afford to Lose
All investing is, in essence, speculation. But some investments are more speculative than others.
For example, you can feel pretty good about the potential for a basic index fund to appreciate over the next 10 or 20 years. Yes, there’s risk, but history tells us it will go up.
Then you have investment classes like cryptocurrency that, while they promise the possibility of significant upside growth, are much more highly speculative. As a rule, you should only speculate what you can afford to lose.
Whenever you make a speculative investment, just assume the money is gone. That’s the healthiest mentality to have. Sometimes you’ll win and other times you’ll lose, but if your attitude is in the right place, the bad times won’t kill your momentum.
6. Hire a Financial Advisor
Given all the available online tools, DIY platforms, robo advisors, YouTube videos, and message boards that are out there, it’s easy to feel as if you may develop your own investment strategy and avoid having to consult professionals. But even in this age of information, it’s a smarter idea to hire a financial advisor.
A professional in the field of investing will be able to look at your situation, analyze your goals, and help you design a diversified strategy that helps you get from here to there in a specified period of time. That’s invaluable!
Get Fat, Not Slaughtered
There’s a popular maxim that says pigs get fat, hogs get slaughtered. In other words, you want to be like a pig: Eat what you can, but don’t get too greedy.
If you turn greedy, things are more liable to get dicey. Use the above tips to lower your investing risk and remember that it’s a gradual, long-term climb. Almost nobody gets wealthy overnight!