Tips for controlling risk in your investments

If you want to invest your money rather than only benefit from the percentage rates the bank will give you on a savings account, you are going to have to take some risks. There are all kinds of degrees of risk. Government bonds are one of the safest low-risk ways to invest but the returns on a government bond are also relatively low compared to riskier investment options. Many people struggle when faced with the decision of how risky they want to be with their investments. Everyone wants the highest returns possible with as little risk as possible.

Fortunately there are some tips that can help you to control some of the risks in your investments. There is no sure equation for the perfect investment portfolio. However, you can create an investment plan that you are comfortable with and feel can benefit you the most given your situation and personal preferences.

You will hear talk of risk most often when the subject of investing in the stock market is brought up. The risk of the stock market involves the fact that no one can perfectly predict the markets behavior and the value of your stock can either go up or down at any moment. If you are trying to control the risk to your investments in the stock market, you will need to minimize both counterparty and investment risk.

Counterparty risk is the risk of possible failure on the part of your investment manager. You can control this risk by ensuring that you use a reputable investment firm. Reputable investment firms have auditors and regulators supervising their actions as well as plans for compensation that are meant to cover applicable losses caused by the firm.

Investment risk is the volatility of rate of return on the investments themselves. Investment risks apply to different investments in different ways. Overall, long term returns in invested money are consistently higher than simply placing cash in a savings account. Equity gained is often worth the risk of a carefully planned investment move.

So what can you do to prepare an investment plan or portfolio that is both lucrative and low risk? You should begin with diversification. When you have a diverse portfolio, you have investments that represent different sectors of the market. If one of your investment shares were to become worthless, you are protected by the benefits you receive from other investment ventures in your portfolio. Areas to consider for your diversification of investments include equities, bonds, and cash.

Equities: investors should consider a variety of segments within the equity market (i.e. pharmaceutical, manufacturing, technological, etc.) Remember that poor performance in one market segment can be offset by better performance in another. This way you have a built in safety net for higher risk investments.

Bonds: A well-diversified portfolio would include investments in both corporate and government bonds. Bonds are relatively low risk and can provide the safety net of the less secure equity portions of your investments.

Cash: Placing money in a bank is one of the safest forms of investing. If you choose to not invest in an equities market or in bonds, at least split your savings money between different banking institutions to avoid the risk of institutional failure, inaccessible funds, etc.

Other ideas for controlling investment risk include:

Setting income requirements: As an investor you need to know if the organization you are investing in has income requirements that are prerequisites to giving pay-outs to shareholders.

Set ranges for the asset categories: specify the ranges for each investment category. Know what percentage you want invested in equities, bonds and cash.

Set limits on individual holdings: In the investment policy presented by your investment firm you need to clearly state where your investment dollar is to be placed.

Monitor the volatility of the portfolio's returns: If your losses are exceeding the levels that you are comfortable with, you may consider making some changes to your asset categories and investment policies.