Five Ways to Manage Financial Risk
by Osmond Vitez, Demand Media
Financial investing is a common way businesses and individuals generate passive income streams. Investing money can be done through a wide variety of investment instruments. Stocks, bonds, derivatives, mutual funds, money markets and other items are just a few types of available investments. All investments involve some type of risk, albeit certain investments are less risky than others. Properly managing risk can ensure businesses and individuals generate income and do not lose their capital on unwise choices.
The standard investing guideline for risk management is diversification, which requires businesses and individuals to invest in a wide variety of investments. A common diversification method is to split money in a specific way, such as 25 percent in low-risk money markets, 25 percent in government bonds, 30 percent in domestic stocks or derivatives and 20 percent in international investment instruments. Diversification attempts to spread risk among several safe and risky investments in various economic markets.
Use Savings Account
Businesses and individuals should hold a portion of their capital back when making investments. Using a savings account ensures these individuals have cash on hand for emergency purposes if necessary. Savings accounts may also represent an extremely safe investment if the bank or credit union offers interest on the savings account balance. Businesses and individuals can also use a savings account to electronically transfer funds when buying or selling investments, creating quicker transaction times.
Invest Sooner Than Later
Investing sooner rather than later allows businesses and individuals to let their money work longer and potentially earn higher returns. If investment markets become extremely risky and businesses or individuals start losing money, investment decreases will only reduce earned income rather than the original principal balance. This allows individuals to cash out of extremely risky investments with little economic loss relating to their original investment.
Learn About Investments
Managing financial risk often requires businesses and individuals to spend copious amounts of time learning and understanding about the investment market. A portion of this time should also be spent on learning about specific investment instruments offered by companies and governments. Investment education may come from brokerage houses, investment websites, books or other similar materials. Proper investment education can mean the difference between highly successful returns and significant losses.
Be Savvy, Not Greedy
Financial investing often requires businesses and individuals to be savvy, not greedy. Savvy investors often understand when to cash out and accept current financial returns. Greedy investors will continually wait for the investment to go higher and provide better financial returns. The problem with waiting for investments to go higher is the investments might begin to go down. Significant reductions in investments can occur quickly and erase all financial returns earned on investment instruments.