Profit maximization is the ultimate goal in investment and it is one of the pillars of wealth creation.
However, investing can be quite risky. The higher the risk, the higher the return but if an investor is not careful, the risk, in the long run, can cost him/her time and hard earned money.
Here are four ways of minimizing investment risk.
1. Diversification
Diversification means investing in different industries and asset classes. This will reduce risk because some of your investments fall in value while others will probably rise or hold steady.
2. Harvesting winnings
Every investment has a life cycle and as it nears the end of its life cycle, keeping it longer will not make more money and can even result in losses.
Back to the farming analogy, not reaping your crops when the time is right can lead to losses. When an investment makes a substantial gain, it's usually best to harvest. This stage is known as the cash cow stage and employing a harvest strategy at this point will give you maximum returns and hence offsets risk.
3. Investing in things you understand
Do not suffer from investment myopia. You hear that others are making crazy profits from hot, trendy and fancy investments and you too, desire to make similar investments. You will be inviting risks.
Investing in business and industries that you understand gives you an advantage over most investors. You will not incur risks resulting from ignorance.
4. Insurance
This is the common way of risk management. It is advisable to take an insurance cover for your businesses. You will be compensated for risks incurred provided they meet the insurance policy.
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