The risks of investing
Investing involves risks. How high this risk is depends mainly on the way you manage your investments.
There is a risk that you lose all the money that you have invested. The more likely scenario is that if you make a loss, it is limited to a part of your portfolio. There are some important things you need to know before you start investing.
- Before you start investing, make sure you're using money that you don't need in the short term.
- It is a good idea to first create a financial buffer for unexpected expenses.
- Don’t bet on a single horse; instead, spread your investment over multiple companies and in multiple financial instruments.
- Think about the reasons that you want to invest and for how long. Make sure you adapt the risk you take accordingly.
How to reduce your risks
Step 1
Have the right time horizon
Before you start investing, make sure that you don’t need the money soon and decide whether you are prepared to take the risks involved. What are your investment goals and how important is it that you achieve them? Are the consequences big if you don’t succeed? In general, the more time you have, the greater the chance that the goal you have set will be achieved.
Step 2
Spread your investments
Spreading out your investments helps to mitigate concentration risk. This is the risk you take when you invest in, for example, a single equity or only in a certain sector. If things go badly with that equity or sector, this has a major impact on your portfolio.
You can diversify in different ways. For example, you can use different types of investments. There are four main ones: equities, bonds, alternative investments (e.g. commodoties, gold) and liquidities.
In addition, you can diversify by sector and region. By spreading your investments over different sectors and regions, you will be hit less hard when, for example, a macroeconomic problem exists in a region or when a certain sector is hit.
If you choose MeSolo, it is important that you build up a well-diversified portfolio yourself if you want to reduce the risk. When you choose MeManaged, you can easily decide for yourself how much risk you want to take. We will then ensure that your investment is effectively spread out.
Step 3
Work on your knowledge and experience
How much you know about investing and how much experience you already have are also important considerations. You can only assess the risks of an investment type or product if you understand how it works.
If you are not interested in learning about investment, or you lack time for it, let us do the work for you and choose MeManaged.
Professionals with decades of experience will manage your investments for you.
Step 4
Is it better to invest smaller amounts on a regular basis?
Markets fluctuate due to economic and political changes. This impacts the value of your investments. You might find it safer to invest a smaller amount on a regular basis instead of a larger sum all at once.
You are then less likely to put the entire sum into the market right before a downturn. From the point of view of returns, however, studies show that investing the entire lump sum produces better returns most of the time.
At the end, your choices come down to your personal preferences, character and financial situation.
Which approach to investing suits you best?
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