Pockets of financial risk

There are lots of risk areas in today’s market outlook. The bull market has been running for a long time and is due for a correction. The markets are volatile with regular corrections of 5% or more. Many people are getting nervous about something major happening.  Oil prices are way up and then way down. We just got through the housing bubble! What is the next bubble that we need to worry about? There are pockets of financial risk for every investor and it remains to be alert to protect yourself from these volatile swings.

Minimize Pockets of Financial Risk

One of the best ways to manage pockets of financial risk is to follow the standard investing rules:

• Invest in high-quality dividend-paying stocks.
• Better yet if they have a record of regularly increasing their dividends!
• Invest diversely across market sectors and
• Stay away from speculative stocks and bonds.
• Re-balance once or twice a year
• Focus on income without getting involved in high-risk bonds or stocks.

More Details

High yield bonds – are usually high yield because they are high risk. While the yield can be attractive, the risk can also be very high. Can you afford to lose a major part of your investment or the total investment? They are sometimes classed as junk bonds. Low-risk government bonds and corporate bonds from high-quality companies have much less risk and pay a lower yield as a result.

Small-cap stocks – from smaller companies can swing widely and unless you have the stomach for these wide swings, you may not want to get involved in these types of stocks. Yields might be higher when you include potential growth, but then the losses can be large if the industry is unkind to them.

Slow and steady and investing – while not exciting, perhaps even boring, will deliver on average far better results with far less risk provided that you follow the rules mentioned above.

Systematic investing – is another way of managing risk, a regular investment in stocks for example that captures both the downturns and the upturns will deliver excellent results. You will buy both high and low with the average cost working out to your favor over the long term.

Borrowing solutions – such as a line of credit is much cheaper than using a credit card for example at 20% or higher. A line of credit that is tied to the equity in your home can be as low as 4% or even lower.

Assess your personal set of pockets of risks and take the necessary actions to manage each risk area to avoid a catastrophic impact in the future.

For more posts about financial mistakes we all make from time to time, click here.