5 minutes
Investing your capital is a very important decision that carries risks that you must assume. Ideally, these should be low and do not damage your assets.
Every investment involves a financial risk, that is, the chance that the investment we make will generate a loss of money, or that the profit we hoped to obtain will take longer than expected. To learn how to reduce financial risk, we have to know that there will always be uncertainty about performance.
This uncertainty does not constitute the risk itself, but is influenced by different factors. Among them, the changes that are experienced in the sector in which we have chosen to operate, the failure to recover the invested capital and the inherent instability of the markets. So let’s review some of the financial risks that exist and tips to reduce them.
What kinds of financial risks are there?
It is not our goal to enter the world of finance, but it is important to know what the most common financial risks are that investors face. For example, credit risk is generated when one of the parties defaults on the payment of an acquired debt. The liquidity risk It arises from the impossibility of one of the parties to assume its commitments, precisely due to lack of cash.
Finally, we can mention the market risk, which is present in the operations that take place in the financial markets. In this framework, exchange risk is related to investments in different currencies in which one suffers fluctuations. Also, interest rate risk arises from a drop or rise in interest rates, such as a mortgage.
Tips to reduce financial risk
Experts agree that the basis for reducing the financial risks posed by an investment is to have a strategy. We know that “zero risk” is not possible. However, what we can do is inform ourselves and take some actions to minimize it.
1. Analyze the return on investment
At this point it is important to recognize what are the different types of financial assets, such as bonds, stocks or cash, among others. Each of them has its pros and cons.
For example, the great risk of money is inflation, while bonds are safer in that regard. But they vary with the interest rate and offer restrictions on their settlement.
2. Diversify the investment and therefore the risk
Investing in different types of assets is a very good strategy. Therefore, one of the best tips on how to reduce financial risk.
The proposal is to invest in assets that involve different levels of risk. It is what is called broad investment portfolio.
Sometimes the riskiest operations tempt us because their profitability is as high as their risk, but if it were to go wrong, we will have lost much of the capital in just one investment. This is why it is recommended alternating high and low hazard investments.
3. “Cover” the investment
The goal of protecting your investment is mitigate the risk that occurs in each of the investments. So, the ideal is to balance the high risk of a vulnerable asset, investing in another that gives us profits if one gives a loss. As much as it is not enough to compensate, at least we will have reduced the negative amount.
It is important to clarify that covering the investment will not imply a direct profit, but it is there to protect you, as is the case with car insurance. We pay the insurance so that it responds in the event of an accident and does not generate a significant outlay of money for repairs.
4. Save to be able to spend
If you earned double, would you spend double? We mean spending everything you charge per month, even though you can save.
In other words, you adjust (or misalign) your expenses to your income and do not allow yourself a margin to save. In this sense, the concept of Financial Freedom it brings with it the fact that the money must be saved (or invested) after having spent what is just and necessary. Before investing we need to have saved a sum that we will make work and grow.
5. Avoid debt
The premise would be that we cannot declare bankruptcy if we do not have debts and we will not be negative. Although we understand that debt is often necessary because circumstances are pressing, the ideal is to refrain from contracting it.
It is common that people do not pay attention to the interest that a certain loan generates. And unless the accounts are taken out of how much will be the amount to be returned when requesting a loan.
6. Reduce expenses
In case you notice that our income is in danger, it is best to save and lead an austere lifestyle. We appeal here to reduce unnecessary expenses that do not add meaning nor real well-being to our lifestyle.
Latest recommendations to reduce financial risk
Time, perseverance and decision-making capacity These are 3 qualities that you should develop if they are not yet part of your investment personality. Finance is linked to events that alter the world order, so it is important that you take the time to be aware of what is happening in the great powers.
You have to be patient and give time to the result of your investments because, generally, they do not arrive overnight. Finally, you have to be able to make quick decisions and even change the direction of your investments if necessary.
We hope you can follow these tips and that the risk of your investments goes down. In the same way, may your earnings increase.
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