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How to manage your investment risk

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The pandemic has brought forth a new batch of investors that are younger and more diverse – some of whom do not have the financial education to understand the risks and thus have been more vulnerable to misleading ads, which gave the FCA concerns about how misleading adverts were influencing these consumers’ investment decisions.

The FCA has therefore decided to ban some incentives such as “refer a friend” and wants firms to make risk warnings more prominent – which is especially relevant with the cost of living crisis that could induce people to go after higher risk investments in hopes of getting higher returns on their investment.

Under the stricter rules, companies that approve and issue marketing must have suitable expertise, and firms that market certain types of high-risk investments must do more thorough inspections to guarantee that customers and their investments are appropriately matched.


How to reduce investment risk

Decide on your risk tolerance

There is always some risk with any investment, and you have to decide how much to take. All assets will change in value, and your portfolio is likely to be in the negative at times. Setting a budget in advance can manage your appetite for risk. In addition, not every investment carries the same risk; large, established companies are safer than newer, unproven ones. Investing based on what you read online (e.g. social media) is a lot more dangerous than doing your own research and understanding the potential risks to each company and industry.

Make long-term investments

Rather than attempting to earn quick money by timing the market, it is generally preferable to focus on a longer time frame in the market. Smaller corrections will have less consequence on your portfolio this way. It also enables you to employ a strategy called dollar-cost-averaging, in which you invest the same amount at regular intervals. You don’t have to worry about figuring out the ideal timing to buy a stock when you use DCA.

Diversify your portfolio

Not every firm or industry in which you invest will do well at all times. You can minimise the risk of your portfolio encountering downturns by investing in a diverse range of firms, industries, asset classes, and locations. This approach will reduce the overall risk of your investments.

Keep track of your investments regularly

Monitoring your portfolio on a daily basis is definitely counterproductive if you’re investing for the long run. Regularly checking your investments, on the other hand, is a fantastic method to keep track of how your money is performing. Reading business annual reports, keeping up with industry news, and having a strong grasp of the latest developments and shifts will help you make intelligent judgments regarding whether to purchase or sell.

Set stop-losses

An order you place with your broker to automatically sell an investment at a specific price is known as a stop-loss. Stop-losses can give your investments somewhat of a safety net and are best used in accordance with your risk tolerance. Stop-losses not only give peace of mind, but are one of the best ways to reduce your investment risk.

You can read our guide to investing for beginners to help you get started. There are loads of articles and resources designed to help you gain the knowledge you need to become a self-directed investor.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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