Three ways to reduce the risk of your investment portfolio
Strategy #1 to risk-proof your portfolio: Understand what you’re investing in
It’s vital that you understand the business you’re investing in.
For instance, if you invest in a pharmaceutical company, what’s going on in the wider economy won’t have much effect on demand for its products. You can’t say the same for a steel mill where demand will change a lot.
To understand the risk you’re taking on with an investment
, you need to look at the company’s history. Look at how the company’s profits behave in different economic climates.
Strategy #2 to risk-proof your portfolio: Don’t be unprepared
As an investor, you need to expect the unexpected, Phil Oakley in Money Week
explains. Never be surprised by what the stock market might throw at you.
Bad things happen. And they will. The recent financial crisis of 2008 is a reminder of this.
Strategy #3 to risk-proof your portfolio: Diversify your investments
Make sure you invest across a number of different investment classes. For example, spread your investments across:
All of these asset classes and others have their place in a well-diversified investment portfolio.
By diversifying your investments, you can reduce risk. This is because different asset classes tend to move in different directions when economies go through hard and good times.
And bear in mind, when the financial markets go through a period of panic, all assets might fall in value for a time. This is because investors are trying to liquidate their investments for cash.
So there you have it, three ways to risk-proof your investment portfolio.
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