In any investment deal, there will always be potential risks. But there are instances when you could have avoided unnecessary risks. One example is when investors became bullish about buying real estate so that when the real estate bubble burst many have lost their money.
Avoid these three mistakes
But there are best practices when it comes to safeguarding your investments from certain risks and avoiding mistakes is part of these.
A group of experts observed that there are essentially three usual mistakes investors commit. The first is getting fully invested in a single type of asset – either stocks or bonds. The next mistake is limiting that investment into one or two investments within that single asset type. Finally, people tend to invest in assets whose values have considerably declined and then pin their hopes of a correction happening in the near future.
Diversify your investment portfolio
There are many strategies formulated to protect investments especially in a crisis situation. According to a seasoned financial advisor, the most important is having a diversified asset mix. Finance experts say that in order to mitigate risks, always think about having a diversified portfolio. This involves distributing your investments among different types of assets so that if one asset type doesn’t perform well, you still have money left in other asset types whose values are on the uptrend, have remained strong, or have exhibited minimal declines.
Adopt an asset allocation model
Some follow the “Wall Street” model where asset allocation is 60% stocks and 40% bonds. Others allocate investments among five asset types – cash, bonds, rental real estate, precious metals, as well as short-term and long-term stocks. The percentage allocation for this model largely depends on the amount of investible funds you have and your targeted retirement date.
So what lessons have we learned from the experts? Here’s the summary:
Diversification provides an opportunity to downplay risks. Investing in different asset types which have very little or no correlation at all, reduces risks all the more. Lastly, diversification is critical since even the experts can be clueless as regards which asset types will perform quite well or very poorly in the future. The key, therefore, is having the right allocation and the right amount of investment for each asset type based on a tried and tested model.
