Simple Steps to Cut Risk in the Stock Exchange | Invest in the Markets

Assuming too much risk is a simple way many investors get into trouble. Often driven by the hope make an ?easy? profit, investors both knowingly and unassumingly take on risk? which is ultimately unavoidable. However, what is avoidable is taking on too much risk? the kind of perilousness that can poison your portfolio and cause that gut wrenching feeling that keeps you up at night. So, let?s look at a few simple steps every investor can take to bring balance and peace into their investment portfolios.

Diversify

Diversification is a common word? and if you ask investors, many of them will claim to understand this financial concept quite well. They respond with the traditional sector diversification model which encourages investors to spread their dollars over a variety of sectors. Some go a little further and suggest diversification includes investing in more than one asset within a specific sector. Often these investors are big believers in mutual funds.

Yet for many, diversification becomes a code word for dilution. They simply invest in so many things, in such small quantities, that they dilute their positions? both the good and the bad. They fail to recognize global diversification or diversification over time (i.e. shorter term or longer term investments). Most of all, they often exclude inverse funds that help bring profits to their portfolios when all else is dropping in value.

At the end of the day, investors who have a broad understanding of diversification without diluting their portfolios decrease their risk and provide themselves opportunities to experience profits when all else is falling apart.

Focus on Quality Investments

The temptation is to load up on those investments that did well last year. In fact, I remember sitting down for several years with a financial advisor who would look at the performance of a mutual fund the previous year and if it was in the first quartile, he?d recommend that I shift my money there. Unfortunately, rarely did they continue to perform so well the following year.

Avoid loading up on last year?s winners? or the speculative ?penny? stocks of tomorrow. While diversification may include a speculative stock, it is only a small part of one?s portfolio. In contrast, look for stocks with growing revenues, proven sales, and stable management. These stocks, with their healthy cash flow, are well beyond the risky start-up phase where so many companies flounder for years and even fail.

Plan your Exit Strategy

Knowing when to buy is only part of the challenge. As you know, we suggest the wisest time to buy is when there is a rise in the stock price. Too many investors fail because they buy the dips? only to find themselves holding the investment into what has now become a crater they can?t get out of. I can?t tell you how many times I?ve listened to investors tell me, ?I can?t sell it now? it?s lost too much.? That statement is usually followed by a hopeful claim that it will come back someday.

As stocks rise, so do our point of sale. In other words, we follow the stock up, raising our expectations on the way up? and guarding against any unforeseen downturns. If a stock misses their revenue figures, we are more apt to sell then to hold on with a hope and a prayer. At Invest in the Markets, we?d rather sell our position for a small gain than hold it for any kind of loss. And when we?re up significantly, we don?t want to see those profits evaporate? which they can do all too quickly sometimes.

Investing can be relaxing? and it doesn?t require a gamblers mind. In fact, by putting into practice the simple principles of Capital Preservation, Minimizing Risk, and Maximizing Returns, any household investor can consistently make money without assuming too much risk or getting themselves into financial trouble.

Source: http://www.investinthemarkets.com/risk-management/simple-steps-to-cut-risk-in-the-stock-exchange/

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