Friday, 20 November 2009

Techniques for reducing investment risk (Part 2 of 3)


[1] Choose shares of solid companies, preferably those that pay regular dividends: Unless you are a professional investor, it is advisable to avoid speculative stocks of small enterprises whose future is dependant on one single product or customer. During periods of economic adversity, well-established companies whose products fulfil fundamental human needs tend to fare better than small undertakings.

[2] Never place more than 5% of your savings on a single investment: Even if you make a correct decision today, circumstances continuously change. The easiest way to minimize risk is to spread your savings into many different assets. The rule of 5% implies that, over time, you should aim at having at least 20 different types of investments.

If you save money every month, it will take you less than two years to achieve this target. Risk reduction is worth the effort of researching 20 different investments. Some of them will turn out to be outstanding places for your money, while others may deliver negative results. Since you cannot know in advance, you will be better off by spreading your money.

[3] Diversify your assets amongst different sectors and countries: You have no control over what problems will affect specific industries or countries in the future. Those negative events are, to a great extent, unpredictable.

Follow the example of professional investors and spread your savings amongst different types of assets. If you diversify internationally by placing a good part of your savings in stable countries around the world, your financial future will be less affected by problems in any particular territory.

[4] Understand that nobody can predict with certainty when markets hit bottom or are about to crash: You should never act blindly on someone else's advice, no matter how brilliant their track record is. Everybody makes mistakes and, as a general rule, it is better to trust facts than opinions. Listen to wise individuals, but always check things for yourself.

To be continued in Part 3

[Text: http://johnvespasian.blogspot.com]

[Image by chimothy27 under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses/by/3.0/us]

Techniques for reducing investment risk
(Part 2 of 3)


[1] Choose shares of solid companies, preferably those that pay regular dividends: Unless you are a professional investor, it is advisable to avoid speculative stocks of small enterprises whose future is dependant on one single product or customer. During periods of economic adversity, well-established companies whose products fulfil fundamental human needs tend to fare better than small undertakings.

[2] Never place more than 5% of your savings on a single investment: Even if you make a correct decision today, circumstances continuously change. The easiest way to minimize risk is to spread your savings into many different assets. The rule of 5% implies that, over time, you should aim at having at least 20 different types of investments.

If you save money every month, it will take you less than two years to achieve this target. Risk reduction is worth the effort of researching 20 different investments. Some of them will turn out to be outstanding places for your money, while others may deliver negative results. Since you cannot know in advance, you will be better off by spreading your money.

[3] Diversify your assets amongst different sectors and countries: You have no control over what problems will affect specific industries or countries in the future. Those negative events are, to a great extent, unpredictable.

Follow the example of professional investors and spread your savings amongst different types of assets. If you diversify internationally by placing a good part of your savings in stable countries around the world, your financial future will be less affected by problems in any particular territory.

[4] Understand that nobody can predict with certainty when markets hit bottom or are about to crash: You should never act blindly on someone else's advice, no matter how brilliant their track record is. Everybody makes mistakes and, as a general rule, it is better to trust facts than opinions. Listen to wise individuals, but always check things for yourself.

To be continued in Part 3

[Text: http://johnvespasian.blogspot.com]

[Image by chimothy27 under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses/by/3.0/us]