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How to Manage Risks While Investing in Stocks

The United States bull market has continued its rampage in 2017, with the S&P 500 index surpassing the 20,000 mark and reaching all-time highs. Yet, some investors are getting cold feet, as they point to the fact that bull markets do not tend to last as long as they are now. It has already been eight years since the recovery of the great financial crisis and historically the only other bull market that lasted longer than this was the one from 1987 to 2000.

So in the time of high valuations and risky stock prices, I thought now may be a good time to discuss some strategies to mitigate some of the short-term risks of investing in stocks.

Diversify your investment portfolio with other asset classes

Stocks tend to be more volatile in nature. That is the price we pay for a highly liquid and higher returning asset.

Therefore, to decrease the risk that this volatility can have on your overall portfolio, it may be useful to diversify some of your investments into less risky asset classes.

This could be by investing in bonds or even safer options like bank deposits and transferring money to your CPF Special Account. All of which can provide stable returns but with lower risks.

Diversify your stock portfolio

Once again, diversification is key to managing risks. Besides diversifying your overall investment portfolio, it is vital that we ensure our stock portfolio is not overly concentrated.

We should aim to have a portfolio of more than 10 stocks that operate in different industries and geographical locations. The Singapore market is also home to a wide array of real estate investment trusts, which we can use to diversify our stock portfolio.

Ensure you have sufficient “emergency” cash

One of the major mistakes many investors make is not leaving sufficient cash aside for exigencies.

Emergencies can come in all shapes and forms such as loss of job, medical emergencies or even accidents. As such, we need to ensure we hold sufficient cash to see us through these periods without having to dip into our investment portfolio.

Having to liquidate your stock investments earlier than intended can lead to lower returns or even losses if you are required to sell your investments at stock market lows.

Remove short-term thinking

Do not time the market or use stock volatility to get rich. This has ended badly for many investors, especially those who base their decisions purely on price movements.

A long-term investor will tend to have less risk as stocks tend to rise in the long-term as compared to the short-term.

The Foolish bottom line

Risk management is key to a good investing strategy. Ensuring that we are able to withstand any stock market volatility is vital so that we can reap the longer-term returns that the stock market will most likely generate.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.