The recent correction in the technology-heavy NASDAQ Composite Index is a timely reminder that sharp declines may occur at any time.
Investors should not just train their eyes on the rewards of investing, but should also pay careful attention to the risks.
With high valuations and equally-high stock prices, the sudden plunge would have caught many investors by surprise.
With this event still fresh in everyone’s memory, now is a good time to discuss some strategies to mitigate some of the risks of investing in stocks.
Diversify your investment portfolio
Stock prices tend to be more volatile in nature as they are influenced by business developments and human emotions.
That is the price we pay for a highly liquid and higher returning asset.
Therefore, to decrease the risk that this volatility can have on your overall portfolio, it may be useful to diversify some of your investments into less risky asset classes.
These include investing in bonds or even safer options such as bank deposits.
You could also consider transferring some money to your CPF Special Account, though you should note that this transfer is one-way (i.e. you cannot withdraw the amount until retirement).
All these options provide lower returns that also come with lower risks.
Diversify your stock portfolio
Once again, diversification is key to managing risks.
Besides diversifying your investment portfolio into different asset classes, it is vital that you ensure your stock portfolio is not overly concentrated in just a few stocks.
You should aim to have a portfolio of more than 10 stocks that operate in different industries and regions.
The Singapore market is also home to a wide array of REITs, which can help you to further diversify your stock portfolio.
Ensure you have sufficient “emergency” cash
One of the major mistakes many investors make is not leaving sufficient cash aside for exigencies.
Emergencies can come in all shapes and forms such as loss of job, medical emergencies or even accidents.
As such, we need to ensure we hold sufficient cash to see us through these periods without having to dip into our investment portfolio.
Having to liquidate your investments earlier than intended can lead to lower returns or even losses if you are required to sell your investments at stock market lows.
Remove short-term thinking
Do not try to time the market or use stock volatility to get rich.
This has ended badly for many investors, especially those who base their decisions purely on price movements.
A long-term investor will be exposed to less risk as stocks, as a whole, tend to rise over the long-term.
Get Smart: Managing your risks effectively
Risk management should be an essential component of any good investing process.
Ensuring that we are able to withstand any stock market volatility is vital so that we can reap the longer-term returns that the stock market will most likely generate.
Diversification is also a useful strategy to spread out your bets.
Once your risks are effectively managed, you can then enjoy the sweet rewards that investing has to offer.
This could be the fastest way to jump from a “newbie” investor to a seasoned pro. Our beginner’s guide shows everything you need to know to buy your first stock and beyond. Click here to download it for free today.
Disclaimer: Royston Yang does not own any of the companies mentioned.