4 Easy but Effective Ways to Reduce Your Investment Risks
Each of us has different ideas of how we want to live our lives.
For you it may be wanting to spend time with family, travel the world and experience different cultures. For others, it may be wanting to relax with friends and do nothing.
To be able to achieve the lifestyle you want, you need money, the knowledge to make informed financial decisions and the time to actually live that life.
Investing gives you and opportunity to be able to make money, so you can take off time to live your life the way you want.
All investments carry risks. One thing that should be at the forefront of your mind when you are planning to invest is how you can minimize the risk from your investments.
“All investments carry some amount of risks”
To minimize your chances of making harmful financial mistake, you should consider doing these 4 things.
1. Determine what your goal for investing is.
To meet your investing needs, you will have to figure out;
What kind of lifestyle you want to live
How much you need to fund that lifestyle
If you are planning on retiring, you will factor in;
Where you plan to retire
How you will continue to take care of your expenses when you stop working
The healthcare costs you might incur
For example, your reason for investing may be to retire in 10 years so you can and travel the world. Knowing where you will travel to, how much it will cost to travel to those places and how much you will need to have if you do not want to keep working, will help you develop a plan.
2. Have an Investment plan
With an investment goal in place, you can move forward with crafting an investment plan. An investment plan helps you make informed investment decisions and is not based on how you are feeling at any given moment.
Your investment plan should take into consideration what your investment goals are, how much risk you can tolerate, and your current financial situation.
To determine how much income you have available to invest, you should start by making a budget. Your budget will guide you as to how much disposable income you have available to invest.
Should you find yourself in a situation where you do not have any money left over after taking care of your expenses to invest, it may be time for a lifestyle change. Find ways to reduce your spending and bring in more money.
Switch the cable for something cheaper like Roku or SlingTV.
Buy Generic instead of brand name products.
Use coupons by searching on sites like Honey to get the lowest price on your purchases.
Take your lunch to work.
Then redirect the money you save towards your investing goal. Every dollar adds up.
3. Make use of tax-favored accounts
Tax-favored means that you do not to pay taxes on the profits you make in some cases up to a certain amount. How cool is that?
So taking advantage of this opportunity that the government has given is a great way to jump start your investment.
While there are other types of Individual retirement accounts, the 2 accounts you should consider looking are a 401K and a ROTH IRA.
A 401K is a retirement plan that is offered by your employer, and gives employees an opportunity to contribute a portion of their paycheck in that account. In most cases, the employers match the employees contributions up to a certain percentage 4-6% sometimes.
So basically it is free money that is being given to you by your employer. Not taking the match is walking away from free money.
“Not taking your 401K match is walking away from free money”
Another retirement savings plan to consider is the Roth IRA. The Roth IRA is a Retirement Savings Account that allows your money to grow Tax-free. So you pay taxes on the money before you put the money, but whatever you make on the after that is yours.
There is a limit to how much you can contribute to your Roth IRA…. Usually, $6000 to $7000 depending on your age, so please consult with your tax advisor.
4. Diversify your investments
Diversification simply means putting money into different types of investments.
Spreading out investments to reduce risk is putting your money across many companies minimizing your risk should one company be affected by the downturn of the market.
If you have a mutual fund and one company suffer a major decline or loss, some others may not go down as much or may even increase. As such your overall losses may not be as bad minimizing your risk.
On the other hand, if you bought just one stock and it when down 50%, you lost 50% of that 1 stock.
You can safely invest and live the life that you desire. You just have to take the necessary precautions, do your research and make smart financial decisions. Gaining knowledge is the first and most important step when preparing to invest.
Whatever you decide to do, please consult a financial advisor you trust before making any investment decisions.