Today, investing in stocks can be considered as one of the best way to generate long term wealth.
Every investment has some form of risk associated with it. The investment world works on a simple principle of risk-reward: higher risk offers a better possibility of earning higher returns and vice versa.
With a strategic investment plan, any investor can achieve their long term financial goals with the help of the stock market. There are various risk involved in stock market investment.
But with proper strategy we can reduce risk to invest in stock market, if you know your risk appetite it is not difficult to stay away from more volatile stock and also, diversification key to stock market investing.
Shares comes with risk. An investor should be able to bear the risk then only he should invest in shares. You should have a knowledge about when to withdraw, when to hold on and when to invest.
An investor who knows how to study market conditions and act accordingly can successfully trade.
However, stock investment does not come without its fair share of risk.
Lets us look at a few measures that one can take to make stock market safer-
Strategy 1: Asset allocation
Asset allocation refers to the way you weight the investments in your portfolio to meet your financial goals. It's the act of investing in different asset classes — such as stocks, bonds, alternative investments and cash — that should also take your risk tolerance, tax situation and time horizon into account.
For example, if your goal is to pursue growth, and you're willing to take on market risk to reach that goal, you may decide to place as much as 80% of your assets in stocks and as little as 20% in bonds. Before you decide how you'll divide the asset classes in your portfolio, make sure you know your investment timeframe and the possible risks and rewards of each asset class.
Different asset classes offer varying levels of potential return and market risk. For example, unlike stocks and corporate bonds, government T-bills offer guaranteed principal and interest—although money market funds that invest in them do not. As with any security, past performance doesn't necessarily indicate future results. And asset allocation does not guarantee a profit.
Strategy 2: Portfolio diversification
Portfolio diversification is the process of selecting a variety of investments within each asset class, which can help those looking to reduce their investment risk. Diversification across asset classes may also help lessen the impact of major market swings on your portfolio.
How portfolio diversification aims to reduce your risk in investments
If you were to invest in the stock of just one company, you'd be taking on greater risk by relying solely on the performance of that company to grow your investment. This is known as "single-security risk"—the risk that your investment will fluctuate widely in value with the price of one holding.
But if you instead buy stocks in 15 or 20 companies across several different industries, you can reduce the potential for a substantial loss. If the return on one investment is falling, the return on another may be rising, which may help offset the poor performer.
Keep in mind, this doesn’t eliminate risk, and there is no guarantee against investment loss
Strategy 3: Cost averaging
Dollar-cost averaging is when you invest a fixed amount of money into the same investment vehicle(s) on a regular basis — such as monthly or quarterly, for example — regardless of how the market is performing
How dollar-cost averaging can help reduce investment risk -
With dollar-cost averaging, you naturally buy fewer shares when the market is high and more shares when the market is low. This systematic approach can help you gradually build wealth by diversifying the prices at which you buy more shares of a stock, for example. (Neither price appreciation nor profit is guaranteed, however.) And because this strategy is systematic, it can help you avoid making emotional investment decisions (thus potentially reducing investment risk).
Er. Janmejay Pandey
