No one loves risk. This is the uncontested truth about us human beings. We love gaining but never losing. This is not abnormal in any way because human beings exist to increase. Any form of loss is strongly resisted by our brains. This article will teach you how to start investing as a risk-averse individual and get optimal results.
All forms of investing are risky. The only thing we can do is minimize the risk, not eliminate it. This is why every investor needs to tolerate some level of risk. People who do not have any risk tolerance end up not investing at all.
It is important to note that not investing is very risky. This is the greatest risk you can take on your financial future. Being a financial consultant and advisor for years, I have realized that successful people avoid losing possible returns while average people avoid losing investment capital.
This means that successful people work hard to gain what they do not have while average people work hard not to lose what they have. As they say in sports, the best form of defense is offense. As successful people go for what they want, they find it easy to protect their investment.
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How to Start Investing Without Taking Much Risk
As I have pointed out, you cannot eliminate the risk, you can only mitigate it. These 5 tips will help you secure the returns while taking minimal risks. It is possible.
1. Get Investment Intelligence
Investment intelligence refers to a set of information that helps you make prudent investment decisions. This is what the greatest investors like Warren Buffet and George Soros have. They can judge different opportunities from an information point of view. With that, they avoid making mistakes that could potentially cost them billions.
As Robert Kiyosaki points out in his book, Rich Dad’s Cashflow Quadrant, investors can be placed in 5 levels:
- The “zero financial intelligence” level
- The “savers are losers” level
- The “I am too busy” level
- The “I am a professional” level
- The capitalist level
The first 3 levels, which consist of 90% of all investors, do not have sufficient information to make prudent investment decisions. Many would rather not invest, others will rather put their cash in a bank account, and the rest will choose to delegate the responsibility to someone else and entrust them to multiply their money.
The last two levels of investors have some investment knowledge. They end up becoming the most successful people in the world. As I usually say, making money is not the problem, multiplying it is.
Therefore, knowing how to start investing without much risk starts with self-education. Read books and blog posts to learn how to reduce the risk involved while still getting acceptable returns. The more you learn, the more you earn. Getting more knowledge will help you look at the numbers and the facts as presented by the numbers.
2. Start Small
It is almost guaranteed that as a new investor, your first investment capital will be lost. This is because you do not have the right information and skills to make a return.
Even though you may have some basics, it takes practical experience and skills to become a successful investor. Therefore, it is prudent to start small. As you make returns and learn, you can increase your investment capital over time.
Do not borrow millions to make an initial investment. This is a grave error many people make. When the investment goes down, they are left heavily in bad debt. First, invest your savings and test your principles of investment. After you have gotten returns, you can now consider risking more and more capital.
3. Diversify
Diversification is usually the first answer given by all financial advisors when asked how to start investing by risk-averse people. This answer is correct. Diversification of your investment portfolio means investing in different asset classes to spread the risk.
There are 2 types of diversification:
- Inter-asset diversification: This is where you invest in assets from different industries. For example, you can invest in stocks and real estate. These are different asset classes.
- Intra- asset diversification: This is where you invest in the same asset class. For example, investing in stocks of different companies falls in this category.
Inter-asset diversification is more effective in mitigating risk because it cautions your finances from systemic risks that affect different individual industries. For example, some situations affect the real estate market only. Therefore, if all your assets are in this market, you will be highly affected. If you have diversified to stocks, businesses, precious metals, bonds, etc. you will not suffer major losses.
Diversification aims to have some assets bringing returns even if others make losses. This is a key secret when it comes to how to start investing while minimizing risk.
4. Do Your Due Diligence
Due diligence is different from getting investment intelligence. Getting investment intelligence entails understanding the general principles of investment. Doing your due diligence, on the other hand, entails understanding the facts behind a certain investment opportunity.
When someone tells you of an investment opportunity somewhere, go after the facts. The facts will tell you whether it is a good opportunity or not. Never focus on people’s opinions when judging different investment options. The best thing is to do your research and justify the claims by the facts. Facts will never mislead.
The best approach is to study the past and project the future. This is called forecasting. Similarly, you can follow what is called scenario planning. This is where you try to understand the future and make appropriate decisions today.
For example, you might foresee that electric cars are going to take over in the future. This way, you will decide to invest long term in car companies that are focused on that area. This is due diligence.
5. Avoid Making Emotional Investment Decisions
Emotional decisions lack logic and rationale. They are not supported by the facts. Emotional decisions are therefore risky. When it comes to making investment decisions, always use logic. This is using your brain rather than your heart.
For example, a friend you love and respect may tell you of an investment idea and ask you to invest. The natural tendency is to comply with their demand. When you bring your emotions here, it will be impossible to resist even though the deal does not favor your financial future.
However, it is better to do what is emotionally incorrect to safeguard your financial interests. Demystify the options and make an informed logical decision.
Low-Risk Financial Instruments
Knowing how to start investing without taking much risk requires looking at different low-risk investment options.
Here are some financial instruments that a risk-averse individual may consider investing in.
1. Treasury Securities
Government financial instruments are less risky. This is because the government can print money to repay its investors. Therefore, the possibility of default is considerably low.
It is, however, important to understand that these securities yield below-average returns. If you are in your prime age, only invest in them as a diversification tool and not as the main income-generating instruments. Therefore, consider your financial position and make an informed decision.
2. Dividend-Paying Stocks
Dividend-paying stocks are less risky compared to those that do not. Even if the stocks decrease in value, the dividends you get over the years will caution you against actual financial loss.
Therefore, analyze the company in whose stocks you want to invest in carefully. If they do not have a dividend policy that suits your financial needs, move on. Fortunately, many companies pay dividends to their shareholders year in year out. You just need to do your due diligence.
3. Preferred Stocks
Preferred stocks are given priority over ordinary stocks. They are paid after bondholders are sorted. Therefore, in case the company is pushed out of business, preferred stockholders will be paid before ordinary shareholders upon liquidation of the company’s assets.
4. Fixed Annuities
A fixed annuity is an insurance contract that pays the holder a guaranteed interest rate on their contribution. The opposite is called variable annuities.
The great thing about fixed annuities is that they are simple and predictable. There’s no need for you to learn about the stock market changes since you know what to expect based on your agreement.[1] Fixed annuities are guaranteed. They are paid as long as the company is in a position to do so.
5. Money Market Accounts
These are interest-bearing accounts provided by financial institutions. They pay a higher interest rate than the normal savings accounts. These accounts have insurance protection and are therefore less risky.
6. Corporate Bonds
This is a financial debt security that is issued by a firm and sold to investors. Bondholders receive a fixed or variable interest on their investment and receive their investment capital upon maturity. These are low-risk instruments especially if the issuer is an established firm in the market.
7. Certificates of Deposits (CDs)
This is a type of product offered by many deposit-taking institutions. They offer premium interest rates on deposits as long as the customer agrees to leave the money untouched for a certain period.
8. Value Funds
Value funds follow the value investing strategy used by famous investors like Warren Buffet and Benjamin Graham. It involves identifying shares that are undervalued and putting money in them.
Value funds are low risk because they are sold at a discount. They later bring returns when the market undergoes an auto-correction. However, it takes skilled managers to identify undervalued stocks.
Word of Caution
So far, we have looked at how to start investing without taking major risks and the instruments to invest in. It is also important to give a word of caution on the same.
1. Let the ROI Outdo the Inflation Rate
Inflation is a persistent increase in the prices of commodities. It serves as a measure of the changes in the prices of commodities and services over a period of time. Inflation impacts the cost of living and eats into the purchasing power of money.[2] If your return on investment (ROI) is less than the inflation rate, you have lost economic value.
2. Consider Opportunity Cost
Opportunity cost is the value of the foregone alternative. If you have different investment options, calculate the ROI, and invest in the option with the least opportunity cost.
3. Consider Your Financial Position
Where you are in terms of finance should determine the kind of investment option you choose. People who are just starting should seek both returns and security. If your investment is wiped out, you will have little left to lean on.
People who are established financially can afford to take major risks. After all, when they lose the investment capital, they have enough to fall back on.
4. Consider Your Financial Goals
People have different financial goals. Some want to be very wealthy, while others just want to live a comfortable life. Choose your investment options carefully based on your goals. People who want to be super successful should seek to maximize ROI.
Final Thoughts
As we have seen, it is impossible to eliminate risks. The best you can do is to mitigate them. Therefore, tolerate a certain amount of risk to guarantee better returns. By following the tips in this article, you will learn how to start investing while significantly reducing the risks involves as you focus on the reward.
More Investment Tips
Featured photo credit: Chris Liverani via unsplash.com
Reference
| [1] | ^ | Annuity.org: Fixed Annuity |
| [2] | ^ | Financial Express: What is Inflation? |
