Investing the Smart Way

Joudy Elhadidy
January 7, 2021

People choose to invest for many reasons, ranging from wanting higher investment returns, saving up for retirement, reaching their financial goals, beating inflation, and others.

Typically, people look to generate returns while minimizing risk. Successful investors don't overlook or avoid risk. They utilize successful strategies that can help in managing risk.

Here are a few strategies that savvy investors leverage to mitigate risk.

Diversification

According to Business insider, diversification refers to mixing a wide variety of investments within a portfolio. Investing in a variety of assets such as bonds, stocks, and saving accounts helps in reducing your overall risk exposure. Moreover, if any of the asset classes have incurred a fall in value, this would not significantly affect your portfolio as it would rely on other investments that might have increased in value.

Research

It’s widely known in business that the greater the risk, the greater the reward. However, savvy investors exercise caution, and mitigate risk by researching stocks, track their performance, earnings, and price fluctuations. For example, choose a company that has a competitive edge in its industry, consistently beats its earnings expectations, and has adequate price fluctuations.

Set your Risk Approach

It is critical to identify your risk-profile before starting to invest. According to the CFA institute, You could determine your risk-profile by taking into account different factors that include financial and market knowledge, age, financial situation, and investment goals. For example, say you are 25 years old with no family responsibilities, then you will be able to go for a higher risk. But once you get older and your responsibilities increase and require a more stable level of wealth, you will need to reconsider if it is worth making risky investments given your circumstances.

Reinvest Dividends

Stocks typically pay dividends every quarter. Buying a stock or a fund could be financed by dividends earned. One of its perks is that it will keep you away from spending the amount earned. It also adjusts losses that come from inflation. Another advantage is that it is a form of dollar-cost averaging. When dividends are issued, they immediately revert to buying more shares at that price point.

Take Advantage of Market Drops

A lot of people panic whenever the market is not doing well. They would panic sell, which happens when a lot of people sell their shares at low prices. Those investors would wait until a market recovery before buying new shares. That is not the smartest strategy to follow; investors should not panic when the market drops, it is a regular part of the investment cycle. Think of it as a chance of buying stocks at a discounted price. When looking at the stock-market performance, look at it from a long-term perspective. That is how savvy investors generate returns in the long run.