When you look into your investment opportunities, you may hear that certain types of investments are a gamble. The misconception about stocks or high-risk investments as a gamble stems from the expectations related to the odds of making an investment return. There are methods you can use to limit your risks and maximize your returns.
Focus on the Long-Term Goal
Investing in the short-term has more in common with gambling than you may assume. A key reason is the short-term fluctuations in the market as well as the risks associated with current world events. A problem identified on the news may result in sudden sales and a drop in stock prices. Minor fluctuations and corrections in the market may result in a low return over the short-term.
When it comes to value investing, one strategy that's often used is seeking out companies which have sizeable moats against competition. In a presentation for the Value Investing Club at Google earlier this year, Connor Leonard of the Investors Management Corporation explained two ways of looking at moats and how value investors can benefit from Read More
By focusing on a long-term goal, you have a lower risk of losing on your investments. The short-term fluctuations are a small blip that smoothes out over an extended period. When you want to gamble, enjoy playing a casino game. Do not use the bulk of your investments to make a short-term profit when you have low odds of winning.
Diversify Your Portfolio
The foundation of any investment portfolio is diversification. The reason you want to diversify is limiting your risk. If you only invest in one sector or a single company, then you have a higher risk of losing your savings. Diversification allows you to cut back on the risk of a single sector by balancing it out with a secondary sector.
Invest in several sectors and investment classes. For example, buy stocks and bonds or invest in real estate and stocks. By investing in different asset classes and focusing on a diverse portfolio, you reduce the risk and enjoy higher returns over time.
Consider Dividend Investments
Dividend investments play a key role in any portfolio. The first reason is the guaranteed income from dividends. You receive the money every quarter or year. That allows you to reinvest your dividend income over time. You can also use your dividend payments to cover the cost of your living expenses when you reach retirement age. Over an extended period, the compound interest of dividends will add up and you will have a positive return.
Even though dividends do not give you a large return, it is added to the return you get from the market. That means you still get the return from investment gains in the stock market. The primary difference is that you will also receive a fixed dividend for your investments on top of any investment returns.
Investing can seem like a gamble when you take the wrong approach to the process. Short-term investing means you have a high risk of losing. When you take a long-term approach and focus on investing in the right businesses or real estate, you will see a return on your investment that builds over time. The key is focusing on the right strategy to cut out the risk of short-term fluctuations or corrections in a sector or the market. By focusing on a diverse and well-rounded portfolio and a long-term goal, you will maximize your returns and see growth over time.