Ways to Protect Investments from Risk

A key part of maintaining a strong financial position is to invest money wisely. By using the money available to create more money, an individual is able to achieve a secure financial condition that will bring a sense of peace and allow for choices with regard to lifestyle. Risk is a part of any investment, and making a good return on investment does require some degree of risk. Nevertheless, too much risk is dangerous and can lead to financial ruin. How can investments be protected from unnecessary risk?

Proper handling of monetary resources requires a correct approach to investment. The act of investing involves putting money into a financial vehicle for the purpose of generating a return on that money placed in it. The percentage rate of return on the investment is generally relative to the degree of risk involved in the investment. Financial instruments with a high likelihood of loss or failure will generate a higher rate of return to offset the risk involved. The lesser the risk being taken by the investor, the lower the rate of return necessary to induce the investment money. The wise investor must find a reasonable balance of risk and return necessary to generate the amount of income desired. Overly risky investments will often result in disaster, while overly safe investments will fail to generate the necessary returns.

Reaching for unrealistic returns introduces unnecessary risk into an investment strategy. When a promised rate of return has no connection to the risk involved then there is a high likelihood that the financial instrument involved is either an out and out fraud or an inappropriate investment option for all but the most advanced investors who have the financial means to withstand a complete loss on an investment. Safe investments require time and patience to achieve the result. An advertisement for an investment that promises exceedingly high rates of return in a short time with little or no risk is inconsistent with sound financial principles and therefore should be avoided at all costs. An investor must be aware of his or her financial condition and current spending demands and make wise choices of investments that fit within these parameters.

An investment should never be made in a financial vehicle that is too complicated to understand. If an investment strategy cannot be explained in very simple terms then it is too dangerous to place investment money into. Many new investment instruments are being created to entice people with creative strategies that will produce uniquely high returns, but often they are so complex that the average investor has no idea what he or she is actually getting involved in. Simple risk avoidance can be achieved by choosing to remain with simple bond, stock, and mutual fund instruments which have shown themselves over the long-term to be relatively safe. Unnecessary risk is a result of acting without having all the necessary facts and investing in complex financial instruments is such an action. Avoiding such temptation and remaining with understandable financial vehicles is a simple way to avoid taking on more risk than is necessary.

The more facts that are known about the investment product and the market in which it exists, the easier it is to avoid unnecessary risk. An investor must do the necessary homework in order to assess the ratio of risk and return so that he or she can properly monitor how the investment is doing over time. No investor has the freedom to put money into investments without understanding what he or she is doing. Money is too hard earned for it to be simply wasted on whatever seems best.

Finance is a body of knowledge that investors must study faithfully in order to grasp the basics of money management. This is because acting in  accordance with financial principles is prudent. Proper investing provides an individual with the resources to do what he or she desires. Failure to attain the knowledge necessary to invest wisely is an unnecessary risk that may lead to financial and personal ruin. Investing is not a game, but a serious matter that affects not only the individual involved, but all that depend upon him or her. Thus, taking unnecessary risks with investment money is akin to acting in an extremely rash and foolish manner.

Following hot trends is a sure way to introduce unneeded risk. Often the worst time to enter into an investment is after it has had a high degree of success. Financial markets tend to move upwards over the long term in a fairly narrow range, and when an investment product has had a significant move upward, then it is likely to move back down somewhat to offset that move. Safety is introduced into investment strategy by sticking to a consistent process of putting money in regardless of how the investment vehicle has done recently. Once a good investment product has been chosen, a regular method of adding money to this investment will produce a reasonable rate of return with a minimum of risk over time. No investment strategy is without risk, but reasonable, consistent addition to a product with a good history of return maintains a degree of risk that is more acceptable.

Taking on too little risk can also introduce an element of risk. The rates of return on guaranteed investments are often too small to ensure a rate of return that outstrips inflation. While an appropriate portion of an investment portfolio should be in short-term, low risk investments, these should not be all that an individual has money invested in. There are plenty of investment vehicles that offer a reasonable rate of return for a level of risk that is not much higher than those in guaranteed investment vehicles. Being willing to take on a small amount of risk for a higher rate of return is in fact a safer strategy than to remain solely in investment vehicles that have very low returns. The important consideration is the ratio of risk and return and how that interacts with the individual’s long-term goals in life.

The greatest danger in an investment portfolio is not risk, but unnecessary risk. The investor who takes the time to understand what he or she is investing in, studies to get a good grasp of investment principles, and has the patience to allow investments to grow over time, will take on a reasonable amount of risk. The best way to reduce risk in investing is to do the necessary research, choose investment products with a good track record and regularly assess the investment performance. This process will not eliminate risk, but will keep it within a reasonable range that will likely produce the returns necessary to achieve desired financial goals.