Investment strategies professionals use to minimize risk

No matter what you invest in, there’s always going to be a certain level of risk. Whether you invest in stocks, shares, crypto, or something else entirely, how you manage risk will be one of the factors that influence the success of your investments relative to your goals. But, there’s plenty you can do to avoid investing in assets with risk levels outside of your comfort zone and maintain a balanced portfolio.

From making informed decisions, to diversification, here’s some investment tips that professional investors use to mitigate risk.  

1 Do your own research

If you’ve invested  before, you’ll already know the importance on you doing your own research. While you don’t need an expert-level understanding, you should have a good grasp of the fundamentals and know what you’re investing in before making any decisions.

From industry trends and competitor research, to financial performance, investors analyse as much as they can about any potential investment.

When it comes to crypto, you’ll want to take a similar approach. Investigate the asset. That means exploring some of the following:

• Project research: understand the core objectives and goals of the cryptocurrency project. Read its whitepaper to help you assess its viability and long-term potential.

• Founders: take a look at the founder and team behind the crypto. Their expertise and experience can provide insights into the project’s credibility.
   
• Use cases: explore the practical applications of the cryptocurrency. Assess its relevance within its intended market and potential for adoption.
   
• Competitive analysis: how does the project compare to competitors? Does it have any unique selling points that could give it an advantage over others?
   
• Technology: examine the underlying technology. Is it built on a solid and secure blockchain? Any technological vulnerabilities could impact its success.
   
• Market trends: keep up-to-date on the broader market trends. Understand the demand for the specific type of asset you’re considering.
   
• Performance: review the historical price performance and market behavior of the cryptocurrency. This can provide insights into its volatility (though be careful: past performance isn’t a guarantee of future results).
   
• Security: are there any past security breaches or vulnerabilities related to the cryptocurrency? A history of security issues could indicate potential risks.
   
• Liquidity: limited liquidity can impact your ability to buy or sell the asset. Research the liquidity of the market for the crypto you’re considering.
   
• Coin necessity: what is the function of the cryptocurrency in the overall project? Is it a gimmick to raise money? Or is it an integral part of the project’s ecosystem?

2 Know your risk appetite

This goes hand in hand with doing your own research. It’s no use having a great understanding of an asset if you don’t know your own risk appetite.

Everyone’s risk appetite is different. In general, there are three different risk profiles: conservative, moderate and aggressive. Although it’s unlikely you’ll fall into one of these profiles perfectly, they can help guide your investment decisions. A balanced portfolio will still be made up of both high and low risk assets, however the weighting of these will be different depending on your investing profile.

Your personal risk appetite will be guided by factors such as your financial goals, time horizons and personal circumstances. You can get a better understanding of your risk appetite in our guide.

By knowing your risk appetite, you’ll be more likely to pick assets that are in line with your comfort levels and avoid impulse decision-making during periods of market volatility. So, take some time to assess what your goals are, and when you want to reach them.

3 Diversification

Diversification is a well-used strategy for minimising risk. Professional investors will spread their investments across different risk classes, asset types, sectors, and geographic regions in order to keep their risk exposure in check. A balanced portfolio will make use of a mix of these, with both high and low risk assets forming part of it. 

By diversifying their portfolios, investors aim to reduce the impact of individual investment losses on their overall wealth. If one investment underperforms, the negative impact can be mitigated by positive performances elsewhere. Generally, you don’t want to spread yourself too thin though. Morningstar recommends around 20-30 assets that balance each other out, and align to your risk profile.

With crypto, you have plenty of different assets to choose from. Of course, you have the popular crypto, like Bitcoin and Ethereum. However, there are thousands of alt-coins with other potential use cases that could be a part of a diversified portfolio. And then you can also add some more balance to your portfolio with stablecoins tied to more proven real-world assets like USDT and USDC.

If you want a straightforward way to create a diversified crypto portfolio, you might want to have a look at Luno’s coin combos. You can use them to buy multiple coins in just a few taps. And with different options available, you can pick a combo that suits you: a bit of everything, a collection of the most popular coins or a selection of your choosing. 

4 Focus on time in the market

Timing the market perfectly is incredibly difficult, even for the most experienced investors. Instead, many professional investors focus on time in the market rather than timing the market. 

A long-term investment strategy can help smooth out any short-term volatility and market fluctuations. More time in the market also has an additional benefit of compounding. This is where passive income is earned through methods such as interest, dividends or, in crypto, staking and reinvesting your returns. 

Focusing on the long-term can certainly help you keep a level head. And, if you have a strong understanding of your risk appetite, then you should be in a good place. This will help you invest confidently in assets that match your personal aims, while keeping a focus on the long-term, rather than the short-term ups and downs. 

5 Look to “blue chips”

“Blue chips” refer to large, established, and financially stable companies or assets with a long history of consistent performance. 

Because of their longevity, these companies or assets are more likely to have demonstrated resilience and are less prone to extreme fluctuations compared to smaller, riskier stocks. Some investors choose to invest in blue-chip companies to help them balance their risk exposure as this could provide them with a degree of stability and the potential for long-term capital appreciation.

Crypto is still a nascent industry and yet to establish itself. So stability in these sorts of assets is different to that of more traditional investment options. However, it’s still relative and there are cryptocurrencies that may offer more stability than others because they’ve been around for longer. Established cryptocurrencies like Bitcoin and Etherum, for example, are time tested when compared to others in the market. 

It’s important to remember that risk can never be completely removed from investing. However, taking certain measures can help you reduce the potential impact of market downturns, provide a degree of stability, and increase the potential for long-term investment success. Aspiring investors can use these to make informed decisions and build robust investment portfolios.

*This information should not be construed as a solicitation to trade. All opinions, news, research, analysis, prices or other information is provided as general market commentary for information purposes only and is not investment advice or recommendation. Always obtain your own independent financial advice before investing or trading in cryptocurrency.

About: Andries vanTonder 

He is a Serial Entrepreneur, an Enthusiastic supporter of Blockchain Technology and a Cryptocurrency Investor

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