8 tips for reducing risk when investing
Tip 1: Diversify your investments
Non-diversification of the portfolio is the biggest mistake that investors very often make. The greatest risk of investing is ‘losing your capital’, which is widely known. A textbook example would be the 2007 and 2008 financial crisis. At the time, a large number of investors had only invested in the banking sector or in one specific sector instead of diversified their investments. You can then be severely affected, as one sector may be hit harder than the other. That’s what makes diversification so important as it allows you to spread the risks across a number of countries, continents and sectors, for, on the whole and historically speaking, the stock exchange has always performed remarkably well.
Tip 2: Invest in the long term
I often tell beginner investors that they should reduce their risk by investing in the long term. BY investing over a period of 10 to 15 years, you’ll notice that you’ll hold your pace with the economy and the stock markets, and they rise very often. When you invest on a one or two-year-term basis, there’s no way of knowing how things will pan out. There could be a new corona pandemic, a plane could crash into a building, the world could go into lockdown and, in that case, it’s anyone’s guess how the stock markets will react. But if you can spare your money for ten to fifteen years, you’ll know that you will be able to keep pace with the economy, preserve your purchasing power and perhaps even make some money.
It has also been proven that the longer the term to maturity, the greater the chances that you won’t end up being out of pocket. Increasing your term to maturity is the one factor that can positively affect your returns or reduce the risk of losses. I would consider seven years the minimum and, over 25 years, there’s basically a zero chance of suffering any capital losses. I would consider seven years the minimum and, over 25 years, there’s basically a zero chance of suffering any capital losses.
Tip 3: There is no such thing as a risk-free investment
No, there is no such thing as a risk-free investment. We’ve often promoted that in the past by giving people a defensive profile and subsequently homing in on bonds and fixed-rate products like government bonds. That was the way the old generation used to operate these past decades and that always paid off because, in those days, you were still getting great interest rates of between 8 and 9 per cent. Today, however, we see that if you give your money to the Belgian or German governments, you’ll be lucky to get 0,2 or 0,3 per cent a year…
While these products are all very low in risk, you are faced with a loss in purchasing power in the purest sense of the term. Therefore, I would qualify them as risky products because you know you are losing money. I, for one, would never regard putting money on my passbook as a long-term investment.
An investor with a conservative risk profile, who doesn’t want to take too much of a risk, will be push to open a savings or term account, or to invest in so-called bond funds, because those are considered really safe. However that is not ideal for, at best, you’ll get an interest rate that only fractionally keeps pace with inflation. To be perfectly honest, defensive conservative profiles don’t have a whole lot of choice these days.
Tip 4: Set a personal goal
As an investor, I always have a personal goal in mind. . If you know for instance that you won’t need a certain sum of money for 10 years, then it’s time to look at your dreams and objectives. Do you invest to preserve your purchasing power or are you hoping to buy a property in 10 to 15 years’ time? Are you thinking of getting on the property ladder perhaps? And so on. At a certain point in time you will need your money to make that plan happened. And if you notice that the market has reached a high, don’t hesitate to sell your stock and spread your assets.
The average citizen can thus do everything to have a diversified wealth. Real estate, like your own home, is the best investment and is the best insurance policy in terms of economic well-being. Besides, by investing a little, it is good to maintain your purchasing power, which will hopefully allow you to make a profit.
Tip 5: Don't sell too quickly
The market moves very quickly and when it takes a nosedive, many investors sell too quickly. But they are missing a great opportunity once it gets back on track. I know many clients who sold their stock in March 2020 when the market, which had plunged by 35 %, was at its lowest. That was a massive crash but three months later things had steadied themselves again and soon we saw an 80 % rise compared to its nadir. You wouldn’t like to know how many investors missed out on that because they immediately sold their stock, taking a hit of 25-35 %.
Tip 6: Look into ETFs
ETFs are one of the finest products that were invented in recent decades and they have seen a dramatic rise in popularity worldwide. While still relatively unknown, they will turn the funds industry completely upside down, of that I am sure.
An ETF is a passive fund without a manager behind it and one that follows the market, be it in a specific sector or an entire world index. ETFs take the market average; they don’t aim to give the best return, but they do perform. You could buy 3000 shares, in one go and thus have a very diversified portfolio. You don't have to worry about anything else, because you are investing according to the economy, which is why it is not necessary to actively monitor your investments.
If you compare an ETF to an active fund, there is one factor that really determines the long-term yield: the cost structure banks or investment products operate. As a matter of fact, an ETF won’t charge you any entry fees, a bank, on the other hand, could charge you as much as 2.5 to 3 %. Moreover, there are no or minimal management fees (between 0.2 % and 0.5 %) to be paid while in the case of active funds, the fees can quickly rise to between 1.5 and 2.5 % on average. Over a period of 10 years you are talking 20 %. If you’re investing € 50,000 over 10 years, you’ll end up paying € 10,000 in fees if your portfolio was to remain stable. If your portfolio rises, they can even charge you extra. With an ETF, where you pay 0.2% per year, these fees amount to about 2% over 10 years, which is 90% cheaper. In other words, you save €9,000. These calculations are simple. 1.5% to 2% doesn’t sound like a lot, but it actually is.
I am a strong advocate of investing in ETFs. I am convinced that you’ll get much better results this way. Of that I've no doubt.
Tip 7: Consider where you are in life
When you have a home, built up some assets and find yourself in a financially comfortable situation, protecting your assets will be in the forefront of your mind. In that case, passbooks and term accounts are akin to burning money. At that point in time you can look at investing part of your assets, in an apartment for instance, or look at ways and means to cover yourself against the risks of inflation.
Especially for young people I believe it is important that they invest in a long-term portfolio or have a long-term investment horizon. Of course it will depend on the profile and the volatility you can handle but, where possible, I would advise you to look at investing. There are quite a few possible strategies and opportunities, and they definitely don’t have to be highly volatile.
Another option is to adjust your risk profile downward. People who are a little older start to downsize, and you don't want a 60-year-old with a high-risk profile to have a huge crash just before retirement. That's when you start looking for a way to make your portfolio less volatile.
Tip 8: Get informed and get help
I once had a client who kept saying that management fees of 2 % are not excessive, which, incidentally, are the going rate in the banking sector. That is not quite correct. It should be calculated in fixed amounts. If you are charged 1.5 to 2 % on a portfolio of € 50,000, you don't realize that you are actually paying €1,000 a year, which is a lot of money, and that’s aside from the entry fees you’re charged on top of that. The banking sector can therefore put more emphasis on the importance of diversification and be more transparent about management and management fees
I cannot stress enough the importance of informing yourself and seeking advice. With Spaarvarkens.be we have a community and an investment club, where you can put questions to your fellow members and share experiences. In Belgium, we’re often far too reticent about discussing money matters. While investments may perform very well initially, things may go awry in the longer term because investors are afraid to ask for help. But investing is a team sport. I’m always looking for help myself and I talk to people, analysts and other experienced investors. That’s how I get the information for my own portfolio. In sum, don’t be afraid to put your pride aside and to inform yourself properly!