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Welcome to part 3 of the 3 part value investing basic series. This final post will focus on 3 ways you can reduce risk with your investments in the stock market. If you haven’t done so already, I highly recommend you read posts 1 and 2 beforehand…

• Post 1- 3 tips for value investing basics, gives you a broad overview of what value investing is about and its key aims.
• Building on this, post 2- 3 tips for maintaining your stock market portfolio. This will guide you on 3 key tips to keep on top of your portfolio once you own stocks.

After today’s post, you should have a reasonable understanding of how a successful investor goes about their strategy. This series is to give you a baseline of knowledge on how to make money in the stock market in the most proven way possible, without incurring too much risk. 

So let’s dive into the final section and probably the most important section for beginner investors to grasp. 3 strategies to reduce risk of losing money in the stock market. As Warren Buffett, the greatest and most world renowned investor once said…

“Rule number 1: Never lose money. Rule number 2: Never forget rule number 1.”

So lets learn to reduce our risk of breaking this famous rule.

7. Reduce Risk By Diversifying Your Portfolio:

You should never have all of your eggs in one basket. The same holds true for stocks. The trouble with investing in just one or a few stocks is if something unpredictable happens. This causes fear and problems to occur in the company you hold shares in; all of your stock market value will plummet.

It sure is a highly important idea to be invested in at least 7- 10 companies at any one time. Ensuring that if one company struggles, your other investments can keep your portfolio strong. 

There are 2 key points to consider when diversifying:

1. Each company you invest in should rely on different types of customers and suppliers. Don’t have all companies which rely on supply from a certain country or rely on business from one large company such as apple.
2. Your companies should be of different business sectors. For example if the oil price crashed and all you held was 10 oil/energy stocks, your whole portfolio would struggle. 

So in summary, for a less risky portfolio consider investing in at least 7/10 companies of varying industries who rely on business from varying countries and businesses. This way, if something goes wrong, somewhere in the world of business, it is likely that your whole portfolio won’t be affected and some of your stocks will still be growing. 

One great extra tip I have for beginners struggling with this concept would be to look into investment trusts and index funds. This is like putting your money into an already diversified portfolio set out by already knowledgeable and intelligent investors. This is particularly good if you currently don’t have a lot of money to invest and would struggle to spread it over 7 or more stocks. In an investment trust, you just buy into that one management company. Your money is then diversified over all of the stocks they own. 

My favorite investment trust I use is The City Of London Investment Trust (CTY). It trades on the London stock exchange and invests in a broad range of companies, mostly in the UK. However, these investment trusts often incur a small fee (0.39% annually for CTY) but that’s a good price to pay for added risk mitigation of your portfolio.

8. Reduce volatility Risk By Investing For the Long-term:

As mentioned before, the stock market can be a confusing place. This is because the stock market is run by humans. Humans who are playing with large amounts of their real money and emotions get involved. Negative news can come out causing fear and lots of people sell their shares causing the stock price to go down. The opposite is just as likely. This is due to the emotions of humans. We can barely predict how people will react. 

If you’ve looked at a stock market graph before, i’m sure you’ve noticed that the price can move up and down quite rapidly. You’ll also notice though, that over the long run the stock market generally goes up. This is because the increase in productivity of companies over time, increasing their profits. You see, in the short-term, emotions control the markets but in the long term, investors see companies getting better or worse in terms of profits and act accordingly. Logic takes over. 

This is why, in order to be a successful value investor, you must look to invest for the long term. By this I mean, look to invest in a certain stock for 5+ years once you purchase it. If conditions change in the company, then you are more than welcome to sell earlier than this. However, the intention must be to invest for at least 5 years. This will leave enough time to cancel out the short-term volatility and you will most likely see the true gains the company is worth. In short, long-term investing will significantly reduce your risk in the stock market.

9. Keep Your Cool:

This is my favourite tip to reduce risk in the stock market. In my opinion, it is also the most important investing skill overall, once you have the basics. Leading on from the last tip, the stock market can be confusing and scary sometimes. You are investing real money and it is very common that due to volatility, you will see the value of your investments decrease from time to time.

This is where you must keep your cool!!

A successful investor does not let their emotions make their decisions for them. To make good decisions you first need to choose good companies of a worthy price (tip 1). You then need to keep track of those investments to make sure they still are worthy investments (tip 4). The only reason you want to sell is if the stock becomes overvalued/ expensive or if the fundamentals of the company has changed making it no longer a good investment (tip 3). These are the fundamentals of your investing and there is no other reason you should be buying or selling. 

Tips you can use in times of stock market stress to keep your cool are…

• Remember that you are investing for the long term. If you choose a good company, and it still is, the chances are that it will bounce back and continue to be a profitable stock.
• Only check the stock market once a week or even once a month. Keep up with the news with your stock but don’t get caught up in the volatility of its share price.
• Make sure you only invest what you can afford to lose. It’s important to remember that no matter what you do in the stock market, there is risk. If you only invest what you can afford, you are likely to be less emotionally involved.
• Don’t invest in the stock market!! Some people are just not cut out to deal with the stress of the volatility. If it ends up ruining your days and causing you so much stress in life, is it really worth the profits you could make. Your quality of life is more important.

I hope this helps…

So those are my 9 beginner points to anyone looking to begin investing in the stock market. Now you should have a solid baseline knowledge of what successful stock market investing looks like. You can now dive deeper into the strategies to get started for yourself.

Keep posted with the investing section of the Money Your Concern Website. More and more investment lessons and advice will be uploaded there over the next few months. You will also find recommendations for the best investing books I’ve read and places you can go to further your knowledge in becoming a great stock market investor.

I hope you gained great value out of this 3 part series. If you liked it or if you have any questions or info to add, i’d love to hear from you in the comments section below. Investing in the stock market has become a passion of mine and I’m always more than happy to learn more and to share my knowledge.

Thanks. Best of luck with your investing journey.

Harry