The world’s stock market exchanges have a combined market cap value of $89.5 trillion, making it one of the largest entities of its type anywhere in the world.
While individual equities may offer value and considerable returns in the long-term, however, they also carry volatility in the short term and may deter new investors from entering the marketplace.
Fortunately, there are steps that you can take to minimize risk as an investor, creating the potential for more sustainable returns in the future.
Why is Investing in Stocks an Attractive Option?
There’s no doubt that investing in equities is a highly popular endeavor, while the sheer diversity of stocks on offer make it possible to identify stocks with a variety of potential risk profiles.
For example, those of you with a sense of risk aversion can target blue-chip stocks, which typically rise incrementally year-on-year and deliver regular dividend payments to investors across the board.
Alternatively, you can target other stocks to earn an average annualized return of 10%, from small and mid-cap equities to large-cap alternatives that represent big corporations (such as Google or Amazon).
Investing in equities also enables your portfolio to grow with the economy, while this can provide a viable hedge against inflation in instances where this continues to rise.
How to Minimise the Risk of Investing in Equities
The question that remains is what steps can you take to minimize the risks associated with investing in equities? Here are some ideas to keep in mind:
Consider Dollar-Cost Averaging: This is a relatively simple concept and one that refers to the process of investing the same amount of money each month (or quarter) rather than making a single, lump-sum investment. This applies to any relatively large capital holding, and by investing periodically with small amounts of money, you reduce your real-time exposure and the inherent risk of losing all your cash due to poor timing.
Invest in Indices: If you’re deterred by the volatile nature of individual equities, you could target indices such as the S&P 500, Nasdaq 100, or DAX 30. These can provide coverage of specific industries or the leading equities within a particular country, but either way, they provide instant diversification and minimize your real-time market exposure. They can really help to minimize your losses over time while enabling you to speculate on price movements rather than being burdened by ownership.
Diversify Across Different Market Caps: You can also diversify your portfolio by investing in various market caps, within actively managed funds that include a broad range of options. Market cap refers to the total value of a company’s publicly traded shares, while some funds will feature between 25 and 40 diverse positions across this spectrum. This type of fund is capable of delivering above-average returns on capital based on a sustainable competitive advantage.