Risk Management Strategies for Investors

George Soros once said, “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” So in this article, I’m going to share with you three golden rules about risk management for investors.

Golden Rule No. 1 – Invest With Your Spare Cash

The first rule in investment is to invest with money that you do not need to use for the next few years. I realise that one of the main reason investor lose money is when they find themselves forced to sell their investments at undervalued prices because they need the money for their personal expenses. However, when you invest with your spare cash, you do not need to sell out of fear or necessity during bad times.

Golden Rule No. 2 – Liquidity Management

During times when stock markets are crashing, you do not want to end up holding onto the stocks, instead you want to make sure that you have enough ‘bullets’ to ‘shoot’ when the market is weak. The worst thing that can happen is that when the stock market crashes, you do not have money to buy any. Warren Buffett once said, “Cash combined with courage in a crisis is priceless”. Therefore, never put all your cash in investments. Instead, always make sure you have at least 20% of your net worth or 6 months of monthly expenses in cash or cash equivalent. Although cash is the lousiest investment, in times of market correction, Cash is King!

Golden Rule No. 3 – Do Not Over Diversify

Warren Buffett said, “Diversification is protection against ignorance.” However, do take note that Warren Buffett invest into different types of investments as well. In one of the articles I read, he was investing into Silver. I believe not in over diversification but Focus Diversification because no matter how great an investment may seem to be, I can’t put all of my eggs in one basket. While it is important to diversify, it becomes counterproductive if you over diversify into too many types of investments. You will soon find it tough to study and monitor all of them.

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