Investing: How to Lower the Risk, part 1

Investing: How to Lower the Risk, part 1

By Keith Bunn Jr.

April 14, 2013

Knowledge and Diversification

I learned a few weeks back that a family member lost a lot of money in their investments during the Great Recession. I don't know all the facts and figures of it all, but from what I was told, it sounded like they were not diversified enough in the market. 

You see, when it comes to investing, if you want to lower the risk of losing your money, you need two things on your side, knowledge and diversification. First, you need knowledge, meaning you need to know all the ins and outs of the investment you're thinking of getting into to the point you can explain it to someone else and they get it. When you have that kind of knowledge, you will know what kinds of investments are too risky for you. Second, you need to be diversified. Diversified simply means to spread around. Have you ever heard the old saying, "Don't put all your eggs in one basket."? Essentially, that's what diversification means. Don't put all your money in one type of investment. Simply because if the market goes down and you have the majority of your money invested in one company stock, you have a greater risk of losing all your money. Now if your investments are spread around several different types of investments and the market goes down, you will more than likely still lose some money. But while some of your investments may have dropped quite a bit, others may have dropped slightly or stayed the same and you didn't lose your shirt in the market.

Leave it Alone!

There is one more thing you need to know, and need to do if you're going to start investing that is just as important as having knowledge and diversification and that is you need to leave your investments alone. You have to think long term when it comes to investing. You have to understand that the market goes up and down like a yo-yo and if you pull your money out because you freaked out when the market went down then you're just throwing money out the window.

In part 2, I will go over with you the different types of investments you can get into. Which ones are good and which ones aren't (in my opinion that is. LOL)

Questions

1) It is important to have knowledge and diversification in your workplace retirement plans as well. Do you feel you have sufficient knowledge and diversification in those plans as well as in the open market?

2) When the market took a big hit during the Great Recession, did you freak out and pulled your money out of the market or did you remain calm and keep it in?

The main reason I'm doing all this is to give people hope and to try to inspire others. To make them think about their finances, whether they are young or old, so they can win financially.

If you have any questions for me about my posts or about your finances, you can call me at (616) 454-2046 or e-mail me at cavuscoaching@gmail.com. For more money news, facts and ideas follow me on Facebook, or Twitter. Thank you!