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Six strategies to reduce investment risk

28 March 2019

4 minute read

Investors can use various strategies to reduce risk, and limit potential losses. Here, we consider six of these, and explain how they work.

Who's it for? All investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change in future. Their effects on you will depend on your individual circumstances.

What you’ll learn

  • Why funds may be a less risky investment than shares.
  • How regular investing could smooth returns.
  • Why focusing on the long-term plan is crucial.

Stock market volatility is a reminder that investments can fall as well as rise in value, and any investment involves risk.

Yet while it’s impossible to avoid risk entirely as an investor, and you could make or lose money, there are strategies you can use that may help protect your capital.

Here, we consider six ways to potentially help safeguard the value of your investments.

1. Invest in pooled funds

Investing in a fund, such as a unit trust, an Open Ended Investment Company (OEIC), or an investment trust, gives you exposure to a wide range of companies helping you spread your overall risk. You’ll also benefit from the experience of a fund manager who will make investment decisions on your behalf.

By contrast, investing in individual shares takes some skill, and could potentially leave you more exposed to losses, as it relies on the fortunes of a single company rather than the average of many. If a particular company you’ve invested in runs into trouble, you could lose some or all of the money you’ve invested. Of course, no matter where you invest or what strategy you take, there is still the risk your investment could fall in value.

Discover more about how funds work

2. Consider one-stop solutions

You may want to invest in a variety of assets – including cash, fixed-interest bonds, property and equities - to provide some diversification and avoid relying on one particular investment to produce gains. In theory, this may help to reduce the risk of losing money, as the asset types that are performing well can hopefully offset those that at the same time are experiencing a period of poor performance.

Building a diversified portfolio can seem an onerous task, but there are simple solutions available. There are plenty of funds that hold a diverse range of assets, such as Barclays Ready-made Investments. These are funds that include a variety of assets for a hassle-free way to build and maintain a diversified portfolio with global exposure. You can choose the level of risk you’re comfortable with, but remember that higher potential rewards tend to mean a greater risk of loss.

Please remember that this is not a personal recommendation and there may be other investments which may better suit your needs. If you’re not sure where to invest, seek professional advice.

Find out more about Ready-made investments

3. Focus on your long-term plan

Staying invested over the longer term, preferably five years but ideally longer, gives your investments greater chance of positive returns though there can be no guarantees; you can lose no matter how long you hold your investments. This means you may choose to ignore daily or short-term volatility that might occur, while focusing on the long-term growth potential of your investments. It’s also wise to remind yourself why you chose the particular investments in the first place.

While it may be important to check how your investments are performing around once or twice a year, avoid monitoring them too often. It may be tempting to check performance frequently, which can be easy to do online, with the potential that you’ll be prompted to react if there’s a sudden fall in value, and sell at a loss. By monitoring performance only occasionally, you’ll hopefully avoid making unwise decisions to cash them in earlier than necessary.

Read about the importance of staying invested

4. Invest globally

Investing in global funds adds a further layer of diversification, enabling you to include a wide range of stocks from around the world within your investment portfolio, rather than focusing on, for example, the UK and its economy alone. If one region’s stock market suffers a fall in value, gains elsewhere will hopefully make up for these losses.

Global funds may invest in companies in both developed and emerging markets, enabling investors to gain exposure to a wide range of economies with different demographics and dynamics at play. For example, emerging markets often benefit from young populations, and economic growth that can be valuable to investors. However, it’s important to bear in mind that emerging market investments can be particularly volatile and may be less regulated than other markets. They should therefore typically only form a small part of a diversified portfolio of investments.

Remember too that with any overseas investment there is currency risk involved. Investing when sterling is weak will increase the value and cost of overseas investments, while if the pound is strong, this reduces their value.

Learn more about why a global approach might appeal

5. Consider regular investments

Regularly investing money into the stock market rather than putting in a lump sum could smooth returns over time, because you’ll benefit from so-called ‘pound cost averaging’.

This means your investment buys more shares when prices are low, and less when they are more expensive, with the theory being that you’ll effectively pay the average price over a fixed period, which can help smooth out market volatility. However, this strategy, as with any other, won’t always work and you could end up with lowers returns than if you’d invested one lump sum at the outset.

Find out more about the benefits of making regular investments

6. Use a stop-loss order on share investments

Some investors who trade regularly use stop-loss orders to help protect themselves from any sudden market setbacks.

When you put a stop-loss order in place, this means shares will be sold automatically when they reach a particular price. This strategy may be used to protect profits, as well as to limit any losses. For example, a stop-loss order that’s set at 10% below the price will limit your losses to 10%, although how you use this strategy depends on your preferences and attitude to risk.

Read more about how stop-loss orders work

It’s important to remember that no matter what investment strategy you choose, you could still get back less than you put in. If you’re not sure about investing, seek independent advice. Tax rules can change in future and their effects on you will depend on your individual circumstances.

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