How to Start Investing Without Taking Major Risks
No one loves risk. This is the uncontested truth about us human beings. We love gaining but never losing.
These 5 tips will help you secure the returns while taking minimal risks. It is possible.
1. Get Investment Intelligence
Investment intelligence refers to a set of information that helps you make prudent investment decisions. This is what the greatest investors like Warren Buffet and George Soros have. They can judge different opportunities from an information point of view. With that, they avoid making mistakes that could potentially cost them billions.
As Robert Kiyosaki points out in his book, Rich Dad’s Cashflow Quadrant, investors can be placed in 5 levels:
- The “zero financial intelligence” level
- The “savers are losers” level
- The “I am too busy” level
- The “I am a professional” level
- The capitalist level
The first 3 levels, which consist of 90% of all investors, do not have sufficient information to make prudent investment decisions. Many would rather not invest, others will rather put their cash in a bank account, and the rest will choose to delegate the responsibility to someone else and entrust them to multiply their money.
The last two levels of investors have some investment knowledge. They end up becoming the most successful people in the world. As I usually say, making money is not the problem, multiplying it is.
2. Start Small
It is almost guaranteed that as a new investor, your first investment capital will be lost. This is because you do not have the right information and skills to make a return.
Even though you may have some basics, it takes practical experience and skills to become a successful investor. Therefore, it is prudent to start small. As you make returns and learn, you can increase your investment capital over time.
Do not borrow millions to make an initial investment. This is a grave error many people make. When the investment goes down, they are left heavily in bad debt. First, invest your savings and test your principles of investment. After you have gotten returns, you can now consider risking more and more capital.
Diversification is usually the first answer given by all financial advisors when asked how to start investing by risk-averse people. This answer is correct. Diversification of your investment portfolio means investing in different asset classes to spread the risk.
There are 2 types of diversification:
Inter-asset diversification: This is where you invest in assets from different industries. For example, you can invest in stocks and real estate. These are different asset classes.
Intra- asset diversification: This is where you invest in the same asset class. For example, investing in stocks of different companies falls in this category.
Inter-asset diversification is more effective in mitigating risk because it cautions your finances from systemic risks that affect different individual industries. For example, some situations affect the real estate market only. Therefore, if all your assets are in this market, you will be highly affected. If you have diversified to stocks, businesses, precious metals, bonds, etc. you will not suffer major losses.
Diversification aims to have some assets bringing returns even if others make losses. This is a key secret when it comes to how to start investing while minimizing risk.
4. Do Your Due Diligence
Due diligence is different from getting investment intelligence. Getting investment intelligence entails understanding the general principles of investment. Doing your due diligence, on the other hand, entails understanding the facts behind a certain investment opportunity.
When someone tells you of an investment opportunity somewhere, go after the facts. The facts will tell you whether it is a good opportunity or not. Never focus on people’s opinions when judging different investment options. The best thing is to do your research and justify the claims by the facts. Facts will never mislead.
The best approach is to study the past and project the future. This is called forecasting. Similarly, you can follow what is called scenario planning. This is where you try to understand the future and make appropriate decisions today.
For example, you might foresee that electric cars are going to take over in the future. This way, you will decide to invest long term in car companies that are focused on that area. This is due diligence.
5. Avoid Making Emotional Investment Decisions
Emotional decisions lack logic and rationale. They are not supported by the facts. Emotional decisions are therefore risky. When it comes to making investment decisions, always use logic. This is using your brain rather than your heart.
For example, a friend you love and respect may tell you of an investment idea and ask you to invest. The natural tendency is to comply with their demand. When you bring your emotions here, it will be impossible to resist even though the deal does not favor your financial future.
However, it is better to do what is emotionally incorrect to safeguard your financial interests. Demystify the options and make an informed logical decision.
Low-Risk Financial Instruments.
Here are some financial instruments that a risk-averse individual may consider investing in.
1. Treasury Securities
2. Dividend-Paying Stocks
3. Preferred Stocks
4. Fixed Annuities
5. Money Market Accounts
6. Corporate Bonds
7. Certificates of Deposits (CDs)
8. Value Funds