By Victoria Scott - Harvard University - College Fellow - Cambridge, MA
Investing comes with risks. Learn how to minimize yours to avoid investment inferno.You may have experienced this before: the gut-wrenching feeling of loss when your hopes, dreams, and/or money, are lost. You have invested your savings into one company or a series of economically unstable stocks, sure that you will make a large profit. You are enormously successful for a while but, before you know it, the stock market price plummets, the economy crashes (or the apocalypse comes) and you are left with nothing. Investing all of your money in the stock market could be the kiss of death. Investments are like eggs, they are delicate and should be handled with care. Although you may not have control over the fickle market, you do have control over the investments you make. Here are five essential tips to prevent putting all of your eggs in one basket.
Diversify, diversify, diversify.
Do I need to say it again? Diversify! One of the main reasons why young investors lose money is because they fail to vary their investments. To prevent falling into an asset abyss you must spread your investments over a variety of sectors (bank deposits, technology stocks, etc.). By dividing your cash into different sectors you will lower the amount risk that comes with investing all of your money in a single market.
Consider mutual funds, money market funds or ETFs.
Mutual funds, money market funds and ETFs (exchange-traded funds) are appealing alternatives if you don’t want to invest in stocks and bonds. These funds pose fewer risks than investing into the stock market. In the 2008 crash, mutual funds went down by 22% compared to S&P 500 index’s 37% decline. Additionally, the funds reduce your chances of losing your principal investment.
Investing in the stock market is a lot like dating. You wouldn’t walk into a restaurant without knowing the pertinent details about your date would you? Never! Before you buy a stock, research the company. Look at its earnings, sales, debt, equities and the risks of buying the stock. If the financial statements are promising, go ahead and buy!
Be wary of hot stocks.
It’s too good to be true. That social media stock you’ve been eyeing is doing well and becomes the “highest-rated stock”. When I learned of the Twitter’s stock debut, my knee-jerk reaction was to invest in the company because of its high earning potential. However, those who invest on impulse or blindly follow the latest stock market trends are bound to end up with big losses.
Determine your level of risk.
Can you handle risky situations, or do you prefer to play it safe? Determining your risk factor is an important to deciding how much you will spend on stock. That is to say, the more eggs you put in your basket, the higher the gamble. Each investment comes with a certain risk, how much of that risk you are willing to buy into will could dramatically change your investment portfolio.