The problem of minimizing risks when placing investments can be solved by different strategies. However, it is impossible to avoid the need to deal with risk management if you don’t want to lose your capital. One of the secrets that experienced investors use is to divide the risk of investing money in one project into several risks independent of each other. This mechanism is called risk diversification and assumes dividing the invested money among several projects. Such an investment strategy is called hybrid and can be advisable to those who want to participate in investment activities but are afraid of the possible loss of capital from unsuccessful investments.
Why Do You Need an Investment Strategy?
Is it necessary to develop some kind of special strategy for investing, or can you act spontaneously, relying only on your intuition and changing circumstances? Many new investors think that developing a strategy can be avoided. But when faced with the adverse consequences of not having one, they realize its importance and even centrality to success. Developing an investment strategy solves several tasks at once:
- Determines the way to achieve a long-term goal. Without a strategy, there is a risk of losing sight of the goal under the influence of constantly changing markets.
- Allows you to quickly make decisions in critical circumstances.
- Shows ways to maximize profits.
- Defines the stages of achieving a long-term goal. The implementation of each of them creates the necessary financial basis for launching the next one.
What Investment Strategies Are Most Common?
Short-Term vs. Long-Term Investments
Each investor has their own character, which largely influences the choice of investment strategy:
- Some people are willing to wait patiently for profits for a long time, even if at some point something does not go as planned. If a person is anxious, they will rush to withdraw investments for fear of losing them completely in a critical situation. If an investor is patient and knowledgeable, they will be able to distinguish temporary market fluctuations from the failure of an investment project.
- For active people, it is difficult to wait for returns from investments for a long time. The desire to act will push them to constant experimentation. Therefore, it is better for a person of this type to adhere to an active or aggressive strategy.
If you see the advantages of both approaches, you can choose a balanced or hybrid investment strategy.
Attitude to Risk and Willingness to Take on Risky Investment Projects
- Active investors are willing to take on projects that seem profitable to them. If they lack funds for a specific project, they remain optimistic and easily take out loans, believing in the success of their projects. Their temperament is most suited to short-term loans, which can be obtained very quickly and repaid after receiving the next payment, be it a salary, pension, grant, or anything else. The Payday Depot platform allows you to choose from a variety of lenders the one with the most favorable loan terms. Active investors have a very quick mind, they easily analyze and compare, and therefore, this form of borrowing is ideal for them.
- Conservative investors prefer to rely on their own funds and are reluctant to take out loans. Because of this, they may miss out on profitable projects, launching which requires additional borrowed funds. But for the most part, they do not expect significant profits and see their main task as the preservation of capital and its sustainable, albeit insignificant, increase.
What Are the Benefits of Hybrid Strategies Relative to Risk?
Hybrid strategies are effective because they allow you to combine both of these approaches and behave simultaneously as both a conservative and an aggressive investor. This means that you set aside part of your investment portfolio for long-term investments in guaranteed assets. They are in constant demand in the market and will be able to protect your capital. An example of such an asset is precious metals or low-volatility securities — shares of large companies that have strong positions on the market and have the potential for further leadership.
The second part of the investment portfolio is allocated to more risky projects that can provide rapid capital growth. These should be highly volatile assets that allow for making significant profits on price surges or innovative startups that have the prospect of market triumph.
In What Proportion Should I Invest Money in Risky and Safe Projects?
How to divide your investment portfolio so that the risky and safe investment projects taken together could guarantee at least the preservation of capital?
The proportion of different types of assets in your portfolio is determined individually and depends on risk tolerance. But at the same time, it is important to remember that there should not be significant bias. If there is a significant deviation in one direction, the effect from the combination of different assets will be insignificant:
- A bias towards volatile assets will not allow you to reliably protect your assets from risks.
- A bias towards safe but low-profit projects will not allow you to get the maximum benefit from your capital.
Therefore, experienced investors advise sticking to the 40×60 ratio, where 40% of the investment portfolio will be allocated to profitable but risky projects, and 60% — to reliable ones with a low return. This proportion is widely used because it is effective in most cases. But that doesn’t mean you can’t choose a different asset allocation.
Hybrid investment strategies provide the investor with both a sense of security and the prospect of growth. Therefore, they are suitable for most investors — both those who value dynamics and are full of entrepreneurial passion and those who adhere to stability and do not like sharp moves. If you are not sure that you can manage your money wisely, you can contact Hybrid Funds, where investment decisions will be made by professionals. In any case, you will be able to correct their strategy to realize exactly the goal that you want to achieve through investing.
About the Author
Emily Davis is a certified financial planner (CFP) with a decade of expertise in wealth management and asset allocation.