How to limit the risks of investing
Investing offers potentially higher returns than saving, but it also comes with risks. What can you do to avoid risk?
1. Think about what type of investor you are
Completely risk-free investing doesn’t exist. The rule is: the more risk you take, the higher the potential return can be. That’s why it is a good idea to take a moment to reflect on what type of investor you are, before you dive headfirst into investing. Think about what kind of return you want to achieve and in which time frame—and whether that is realistic. It’s also critical to consider how much risk you are willing and able to take in the years ahead.
2. Spread your investments across different shares and bonds
Investing all your money in one product, market or sector is extremely risky. Whether you are a beginner or American super-investor Warren Buffet—diversification is the holy grail. But is buying thousands of different shares and/or bonds the only answer? No, not at all. Investment funds* offer the perfect solution because they offer a basket of tens or even hundreds of different shares and/or bonds in one fund.
(*) Fund means 'Undertaking for Collective Investment' or UCI. UCI is a general term describing institutions that raise funds from the public and whose activity consists of managing a portfolio of financial instruments. The term ‘fund’ includes both investment companies—such as an investment company with fixed capital (bevak/bevek)—and investment funds (such as mutual funds), as well as their sub-funds.
In addition to equity and bond funds, there are also mixed funds. They invest partly in shares and partly in bonds. They’re another interesting way to diversify your investments!
3. Invest for at least three years
Are you planning on using your savings to buy a house next year? Then it's wisest to leave those savings in your account. Investing is always undertaken for the long term. Depending on your investor profile, it is best to have an investment horizon of three to seven or more years. Investing over a longer term will give your investments time to recover if the stock market dips for a short while.
Repeatedly entering and exiting the stock market is never a good idea: you run the risk of missing out on returns and multiple transactions cost money. Moreover, nobody can predict what the stock market will do in the short term.
4. Don't invest everything at once
Investments never grow in a straight line—rises and dips occur, one after the other. Many people considering investing have fears about starting at ‘the wrong time’, for example, when stock markets are at record highs. If you want to reduce the risk of less-than-perfect timing, you can spread your investments over time. This can be done, for example, by investing a bit of your available money in a fund every month.