Anyone trying to build their wealth would want safe investments with high returns. However, “safe” and “high return” usually do not come as a package deal. Low-risk investments typically provide lower returns in comparison to high-risk ones. On the other hand, even though high-risk, speculative investments can produce greater returns, taking on a higher level of risk also implies that one would be more likely to lose some or even all of their money. Scott Tominaga mentions that risk management is a huge aspect of investing. All investors should try their best to take an appropriate level of risk that balances their personal situation with the potential reward they are trying to achieve.

Scott Tominaga talks about how to manage investment risks

Almost all investments involve some level of risk. How much risk an individual investor is willing to take on would largely rely on their risk tolerance. There are diverse types of investment risk strategies popular today, which can be used by investors to try and limit losses and increase their returns. However, ultimately, it all comes down to the specific investor.  Certain investors have high risk tolerance, and think about risk management strategies less than others. Either way, they may take measures to protect themselves against the inevitability of a correction or a bear market by leveraging distinctive risk management strategies.

Reevaluating portfolio diversification and asset allocation are among the most prominent risk management strategies followed by modern investors. Portfolio diversification is a strategy that involves allocating money across several asset classes and sectors. Following such a strategy can help steer clear of heavy losses in a downturn. In case one stock does tank, others in different classes may not be so hard hit.

Investors should also consider investing in mutual funds that represent different styles like large-cap, mid-cap, small-cap, and international stocks, along with keeping a timeline-appropriate percentage in bonds. Investors getting close to retirement should additionally think about adding a fund with income-producing securities to their portfolio.

As Scott Tominaga says, many investors think that their portfolio is diversified simply because they own a few different mutual funds, however, as they take a closer look, they end up realizing that those funds are all invested in the same or similar stocks. As a result, in case those sectors or companies struggle, investors might lose a significant chunk of their funds. Moreover, they may even avoid overlap by simply looking at a fund’s prospectus online. To further diversify, investors need to think beyond stocks and bonds, and try to invest in commodities, real estate investment trusts (REITs) and exchange-traded funds (ETFs).

Keeping some percentage allocated to cash and cash equivalents is also a good way to help reduce the volatility in a portfolio. Doing so may keep investors from having to sell off other assets in times of need.  The exact amount of cash an investor may hold on to may vary based on their timeline and goals. In case too much money is kept in cash for the long-haul, it might not earn enough to keep up with inflation.