risk
Two Types of Risk and the Allocation of your Savings over Different Assets
Submitted by Van Beek on July 13, 2010 - 10:54Investing means taking risks. High returns without risks are impossible. The potential higher return is the reward for taking the higher risk.
There are two different types of risk:
Why would Germany bail out investors in Greek debt? To save the Euro?
Submitted by Van Beek on April 28, 2010 - 15:12Two issues that are raised in the discussions around the enormous Greek debt have surprised me. Let’s have a look at them and I am curious to hear what you think of them.
When we follow the news, we come across the following topics:
• Germany will or will not bail out Greece
• The Euro drops to the lowest rate in a year compared to the dollar
Let’s have a look at this Germany bailing out Greece and what the Euro has to do with it.
8 ways to spread the risk in your stock market investment
Submitted by Van Beek on October 27, 2009 - 08:32Spreading the risk in your stock market investment is more than diversifying into different sectors. In this blog article we will see 8 ways to spread the risk in your stock market investment and I will go a little more into detail for one of them. This is the one that I wished I had used about 10 years ago.
In the beginning of 2000, I did not have my system yet for recognizing market trends and when to make or when to get rid of your stock market investments. During the boom years before I was always afraid that I was too late to step in since the markets had gone up so far already. And every month I was proven wrong since the markets went up further.In the end the pain became too much to see everyone around me making lots of money while I stayed behind with my savings safely in a bank account grossing me a few percent interest per year. Greed got hold of me and I made up my mind how much in total I wanted to invest in the stock market. I created a diversification strategy by selecting a number of mutual funds each covering a different industry sector.
Major mistake
And then I made the major mistake: I invested everything all at once. The first months were great, but then the market started to tank and my losses started to mount (I did not have the system yet that would have warned me to “get out”).
This brings me to the first way to spread the risk in your stock market investment: Stretch your new investments in the stock market out in time, over a number of months.
Do not make all your investments at the same time or in the same month. Start with only a certain percentage of the total amount you want to invest. Preferably do this of course when our system indicates that it is likely a good moment to start riding the trend up. Add to your investments in the following months, provided that the positive trend continues and you and our system do not foresee any serious warnings.
In this way, you minimize the risk in case we are wrong. And that is always possible of course, but it is essential then to limit the impact. And that is what we do when we are going “in” step by step. And when we are right, we could of course have made more money when we would have gone “in” all-out initially. But that is greedy and risky. I prefer to be happy with the handsome returns I make already by playing it a little more safely.
8 ways to spread the risk
Here is the overview of the 8 ways to spread the risk in your stock market investments.
- Stretch your new investments in the stock market out in time, over a number of months.
- Split the investments that you plan to make during a month in two or more batches and execute these trades at different dates during the month.
- Spread out the selling of your stock market investments over a certain time period. Note that in general I prefer to get “out” more quickly than that I get “in”.
- Diversify your investments over different continents.
- Spread your investments over companies with different sizes.
- When investing in markets abroad, consider how the currencies from those markets might move in strength versus your home currency.
- Spread your stock market investment over different industry sectors.
- Divide your investments over different companies to be less dependent on the performance of one particular company.
The best way for me to realize all this diversification and spreading of risks is by investing in a limited number of well selected mutual funds or exchange traded funds. Otherwise, it would become too time consuming to keep track of all the different companies and markets.
But spreading the risk in your stock market investment is important when you want to sleep well at night and not risking it all.
I am interested to hear how you diversify your stock market investments. Please register or login to comment on this article and share how you spread the risk.
