A common refrain you hear among those who have achieved financial security is that working will help you pay the bills, but it is investing that builds wealth. History has shown that the markets are a great place for long-term returns. However, the short-term volatility they exhibit can be heart-wrenching.
Risk is built into the idea of investing. If you don’t take risks, there are no returns. However, there are things that you can do to mitigate risk and make sure that you are investing and not gambling. The following are some things to consider to minimize risk with private investments.
Get Your Financial House in Order
Just because you have invested money doesn’t mean that you have your finances in order. For example, it is counterproductive to invest money in the market if you have credit card debt with a high interest rate to pay off. The amount that you are accumulating in interest will likely overshadow any gains you make in the market.
While it is important to invest your money, it is also important to get rid of any debts or loans. It would help if you also had a safety net to protect yourself if you lose your job. Most professionals recommend setting aside enough money to cover your living expenses for six months or more. An emergency fund is important regardless of your age.
Finally, think about insurance. Accidents can happen when you least expect them, and they can throw your financial planning upside down. Long-term injury or a natural disaster that destroys your property can set you back years in your financial planning.
Dollar-cost averaging takes some of the emotion out of investing. This means that you set aside the same amount of money every month, quarter, or year to invest. For example, if you plan to invest $5,000 in the market, cryptocurrency, or some other investment, you would not make the entire investment all at once.
You would divide the total you want to invest over six or 12 months. As prices fluctuate, you will be able to average out your investment to earn money at the end of the investment timeframe. Of course, for this to work, you have to be investing in things that are trending up in price.
An example of this could be investing in index funds. Including index funds in your portfolio can help you earn market returns with lower risk. This is because index funds have a low expense ratio. They move in time with the index.
Work with Professionals
Your investment portfolio is at risk if it is built without proper market study and research. If you invest how everybody else is investing, you are likely going to do as well as everyone else, which is typically not good.
Fund administration done by professionals can help. Having access to CFOs, attorneys, CPAs, and private equity organizers can help you build a balanced portfolio based on knowledge and expertise. It can also be a way of leaving a lot of the tedious paperwork, including bank account reconciliations, recording fund expenditures, preparing financial statements, etc., in the hands of someone else. This allows you to focus on the practical things you can do to grow your investment.
Diversify Your Portfolio
Portfolio diversification is where you select several investments where each asset helps offset the investment risk of the other. Diversification is especially helpful if there is a major swing in the market that affects your portfolio.
If you put all of your money into the stock of one company, you would be taking a massive risk because you are relying on the performance of that company to grow your investment. This is referred to as a single security risk.
However, if you have stocks in 20 different companies in multiple industries, your risk for major loss is mitigated. If one sector or one investment is falling, the return on a different investment might be rising. Of course, portfolio diversification does not eliminate risk. With investing, nothing is guaranteed. But it does help lower risk.
There is no such thing as a sure deal with investing. However, there are steps that you can take to improve the probability of your investments being successful.