Financial market uncertainty stirs up fears. This is how to invest your money more safely.
There is no way of investing money without risk. Political or economic growth concerns weigh on the financial markets time after time. How should investors react during uncertain times? Important tips on how to invest your money safely.
1. Investing money safely in the long term
Those who invest on the stock market know that price fluctuations and volatility have to be factored in. Price fluctuations are completely normal. Accordingly, so is being in the red. Investors should therefore not be overly concerned if their portfolio dips into negative territory. Often, price losses are followed by a recovery period.
It is usually better to wait rather than to sell thoughtlessly out of fear of further losses. However, this depends on the investment time horizon reaching far enough into the future. After all, the recovery phase often lasts longer than a stock market crash. However, those who need their capital during this time must effectively book the losses. When investing, the investment risk must be adjusted to the investment time horizon at the start.
Equity market and relevant market drivers over recent years
Source: Datastream/Credit Suisse IDC/Credit Suisse Research
2. Investing money in the long term requires liquidity
Although liquidity is a non-yielding asset, it is mandatory for investors who wish to invest money more safely. After all, for every larger purchase, those with no liquidity must
sell financial investments – potentially during bad times. Therefore, planned liquid assets are an important tip for investing money.
Liquidity, however, can also be used to take advantage of price losses at the start. After all, following a stock market crash, equities, as well as funds and ETFs, can be acquired more cheaply than before. Provided there is a prospect of recovery and free capital is available, investing makes sense.
3. Investing money more safely: Thanks to diversification
Price development is usually different for different financial investments. Risk-conscious investors can take advantage of this by buying various securities that have as little correlation to each other as possible or by investing in diversified funds.
A well-diversified portfolio includes stocks and bonds of various regions and currencies. Commodities, such as gold, offer additional risk diversification; so do hedge funds and, depending on the size of the portfolio, private equity.
4. Detecting imbalances in financial investments
The composition of asset classes within a portfolio depends on the investment strategy. Risk-seeking investors will, for example, strive for a higher share of equities than those who wish to invest money with lower risk. This is because the former are ready to accept higher losses for potentially higher returns.
However, it is not enough to set the portfolio balance only at the start. It is also important to regularly review and adjust this weighting. Otherwise, the equity holding may suddenly be much higher than desired. Subsequently, the risk of loss increases.
5. Investing money defensively in uncertain times
Fundamentally, investors should stick to the defined investment strategy as long as financial or personal circumstances do not change. However, if a market correction is expected, it may make sense to adjust the asset class shares. This protects against major losses.
For example, the share of equities can be reduced in favor of bonds and alternative investments. However, adjustments should be made as part of the investment strategy, as this provides bandwidth for equities, bonds, and other asset classes.
6. Limiting losses for individual financial investments
Staying calm and waiting is often worth its weight in gold when there is high volatility in the stock market. But this is not always the case. It is important to limit the losses, and especially for individual securities or special financial investments. After all, if the fundamentals are bad, there is no point in relying on recovery.
In order to limit capital losses, investors should think about how much loss they are ready to accept. If a security falls below that, it is sold. At the same time, the opportunity arises to invest in other financial investments that are more promising in terms of returns.
7. Investing money safely with options
Those who wish to automatically hedge losses can best do this with options. Capital protection products offer the opportunity to define a floor at which the security is automatically sold. This prevents losses from being higher than manageable.
With options, it is also possible to bet on falling prices. This may make sense if investors expect a stock market crash in the near future, but it also carries risk. Put options entitle you to sell a security at a predetermined price. If the prices actually fall, the investor receives a return.
8. Decorrelation of the financial investment in uncertain times via hedge funds
Hedge funds have little correlation with other asset classes and are therefore a good way to diversify. They also have the advantage of being actively managed. Hedge fund managers can react promptly to market expectations and changes.
In some cases, managers actively hedge their hedge fund against losses. Or they make targeted bets on falling prices. For hedge funds, however, it is important to learn about its strategy and orientation in detail before investing.
9. Investing money without risk requires breaking patterns
People tend to make decisions based on their gut feeling. Even on the stock market. This leads to investors selling securities quickly in cases of loss. At the same time, they will hold on to equities that previously generated returns, even if the fundamentals have worsened. Both are bad.
In addition, many investors intuitively act like the masses. This reinforces volatility – especially downwards. Investors who want to invest their money safely should distance themselves from the herd instinct and, instead, consistently invest according to their own investment strategy.
