When you invest your money the basic objective is to get the highest return with the lowest potential you will not get all or even worse, any, of your investment back.
Risk Aversion Basics
The number of processes and techniques to avoid loosing money while maximizing return is virtually impossible to list. New methods pop up every day.
I am referring to things like laddered bond etfs indexed to central bank rates when giraffes dance in Africa. For me, the best place to start is simple and basic.
Weird esoteric investments and associated practices have their place but these are contextual. If you are a day trader, a bank or a fund manager, things like covered calls, long puts or rate swaps might appeal.
For the average retail investor there are much simpler and possibly more effective approaches to consider first.
Top Three Risk Mitigators
1) Do the research – If you are struggling to understand how an investment works, stop. Only invest in things you personally fully understand how the returns or losses occur.
2) Leverage Asset Classes – There are three basic asset classes. Balance the assets within your investment portfolio according to your willingness to take losses while seeking high returns.
Cash – things like GIC’s, savings accounts, paper money under the mattress. These investments typically have the lowest return and the highest likelyhood at a minimum you will get your original investment back. Cash and savings accounts are typically very liquid.
Fixed Income – things like Government and Corporate bonds the inestments are usually granted a higher priority in terms of security in event of bankruptcy and will pay regular income (monthly, yearly, etc)
Equities – This type of investment is the least secure but can offer the opportunity for the higest return.
3) Balance the Sector – all investments fit into some category. For example real estate, transportation, financial and so on. Overweighting your investment in one sector or another can be profitable but also exposes a greater risk in the event that sector comes under stress. An example of this was financial investments in mortgages suffered as a whole in 2008 due to the crash in the real estate market.
Starting with these three simple to understand concepts can lead you to more advanced concepts, however, understanding the basics will lay a foundation for trying the more complex in the future.