Guest Article. The author’s views are entirely their own and may not always reflect the views of Cowrywise.
Investing is key to growing your money. But what comes to mind when you think and talk about investments?
Two things usually stand out: stocks and bonds.
A stock represents your ownership in a business. When you invest in a stock, you essentially buy a portion of a company’s share. This means you have particular rights in a business, such as making decisions and earning dividends.
Meanwhile, a bond is a debt security usually issued by the government or a corporation. When you invest in a bond, you practically lend money to the issuer. They’ll repay you until the maturity date, and you’ll earn from the interest. That’s how you make more and more money!
But making investments requires financial management, on top of which is conducting risk assessment. Of course, you should identify the investment risks involved and find ways to mitigate them. So, how do you address them when investing in stocks and bonds?
The answer is risk management.
This article shares some tips on how to minimize your financial risks and maximize your earning potential.
How To Manage Risks When Investing in Stocks and Bonds
Nothing is more secure in life than achieving financial growth and establishing your financial security.
Of course, the most common ways to earn some income are getting employed and starting a business. Effective management of business finance is key to the success of any entrepreneurial venture. And what better way to grow your money than to save up?
However, learn from what most affluent people do with their finances to build their wealth. The secret? Invest. Invest. Invest.
The facts and figures don’t lie: Bankrate conducted a survey in 2022 and revealed the top investment preferences of most Americans. Unsurprisingly, real estate topped the list as their number one favorite investment form for three consecutive years.
Wondering what other forms of investments Americans prefer? Take a look at the infographics below:
Of course, the list won’t be complete without stocks and bonds. Many investors have long considered them profitable forms of investments, and that’s why they continue to do so. However, they also come with potential risks, particularly if you don’t do due diligence and risk assessments.
Here’s how to manage risk:
1. Set Clear Financial Goals
As with any financial investment, start by setting goals for investing. Sure, you primarily aim to achieve financial growth and maintain financial stability. However, you must be clear and specific with what you aim to gain from investing in stocks and bonds. Doing so will help minimize your risk.
Jim Pendergast, Senior Vice President at altLINE Sobanco, suggests being intentional and purposeful with your financial investments:
“Stocks let you grow your money if you invest in financially stable companies. Meanwhile, bonds allow you to earn interest if you partner with trusted corporations or government agencies.”
2. Perform Research and Due Diligence
After defining your goals, you must study the financial market before investing. You should know what you’re getting into so that you’ll come prepared. That way, you can avoid or reduce potential risks along the way.
For one, ask yourself if the economy is booming to see if it’s worth investing in stocks and bonds. You must also check your investment prospects, whether large corporations or government institutions. Lastly, assess if your finances can keep up with the investment requirements.
3. Conduct a Risk Assessment
Conducting a thorough risk assessment for your stock and bond investments is necessary. Sure, the economy is thriving, and your prospects have something promising to offer. However, ask yourself: What are the risks involved in my investment portfolio?
Bruce (Mingchen) Chi Co-founder, CEO of SuretyNow, highlights the importance of risk assessment in financial investments:
“Generally, investing means putting your money at risk. However, examining your finances and studying the market help prevent or reduce financial losses. More importantly, set contingency plans to come prepared and ready.”
4. Understand the Terms and Conditions
Any investments, whether stocks or bonds require financial agreements. As such, you (the investor) and the other party (the company you’re investing in) should put everything in writing. Ensure to fully understand the terms and conditions in your contract to avoid financial risk in your investments.
Andrew Pierce, CEO at LLC Attorney, suggests reviewing every detail in the contract agreement. “You must agree to all terms and conditions before signing the contract. Remember, this legal paper protects you as an investor and the other party. A contract helps you avoid financial losses and boost your gains.”
5. Diversify Portfolio
Portfolio diversification entails making various investments in one portfolio to minimize the risk. For an analogy, it’s like allocating your eggs in different baskets. Why? Putting your eggs in one basket can be risky. If your basket accidentally falls off, all the eggs you’ve invested in will be broken.
In this portfolio case, consider asset allocation for other investment forms, such as real estate investment trade (REIT) and cash (savings and CDs). Or, if you’re limiting your investments to stocks and bonds alone, consider specific ones like value stocks and treasury bonds.
6. Employ Dollar-cost Averaging
Dollar-cost averaging involves allocating a fixed amount of money in your investment regularly. This means not changing the amount despite the fluctuating financial market. This investment strategy helps reduce your financial risk.
For example, you consistently share $1000 in your stock investment every month. With this, you don’t act as a trader who buys and sells stocks based on the changing market value. This systematic financial strategy helps you rise above emotional investments and gradually help build wealth.
7. Track and Monitor Your Investments
Financial tracking and performance monitoring should be a part of the overall equation. Think of a high-yield savings account and how you track the money you’re putting in. This approach applies to stocks and bonds, even if you’re using the dollar-cost averaging tactic.
As an investor, crunch the numbers so that you won’t miss out on your monthly contributions. You also want to track and measure the progress of your profits, be they stock dividends or bond interests. Ultimately, that will help you manage your financial risks and make wise investment decisions.
Conclusion
Financial security is key to living a comfortable, blissful, and secure life. While getting a job, running a business and saving up help, investing is still the best way to achieve financial growth. Do a financial risk assessment and consider the practical tips above to guide you in your investment decisions.
About The Guest Writer, Shawn Plummer —
Shawn is the CEO of The Annuity Expert. He has been a licensed financial professional focusing on annuities and insurance for more than a decade. He’s been featured in Forbes, Business Insider and Yahoo Finance.
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