At first glance, playing it safe is usually the smart thing to do, not just in the stock market, but anywhere. No one in their right mind would jump out of a plane without a parachute. Neither would anyone sink their hard-earned money into a company they knew nothing about.
But the fact of life is that everything comes with some degree of risk — nobody really knows what tomorrow may bring. Even if one did, there’s really no way to anticipate or provide for every possibility.
Spiking has some food for thought for investors with little or no stomach for tempting stock market fate, beginning with this little nugget: Where the more poetically inclined might view the stock market as a microcosm of an uncertain world, the philosophical, or rather, the practical investor, recognises risk and does what he can to minimise or manage it.
Is there such a thing as “safe risk”?
Before anything else, let’s take a look at risk for what it actually is: Risk is not necessarily a bad thing. Investopedia quotes modern investment theory as saying that an asset’s volatility is the main component of risk. This means that investors should be able to pay less for riskier stocks. When the market starts to shift (as it is wont to do), the risk of those stocks becomes even higher.
But there are many factors that actually make seemingly risky stocks a lot less risky than they may appear to be at first, which are not immediately made known to the public. A company might turn out to own certain brands or property or have a fantastic management team. Simply put, volatility should not be the only criterion for judging the risk level of a stock.
Risky investments might actually make your portfolio more secure. Investopedia also says that “the risk of an entire investment portfolio is always less than the sum of the risks of its individual parts”. When you add stocks to your portfolio, the tendency is for you to assess the risk that those new stocks carry.
Instead, try to see how those new additions are able to reduce the risk of your entire portfolio. If these new stocks are of a different type or industry, you would be reducing your portfolio’s risk by diversification (which Spiking has discussed in a previous post).
What kinds of stocks are “safe to buy”?
If given a choice between two stocks with pretty much the same returns, play-it-safe investors would obviously go for the less risky choice. Investopedia singles out preferred stocks as being ideal for the risk-averse.
Investors with preferred stocks receive dividends and reap the benefits of capital appreciation if the value of the stock goes up. They also receive these dividends before common stockholders, and if the company should ever go bankrupt, investors with preferred stocks also get preferential treatment.
GOBankingRates also directs risk-averse investors towards dividend-paying stocks, specifically blue-chip ones that give out high dividends. Investors should bear in mind, however, that it is also possible for even blue-chip stocks to lower their dividends, depending on how well they are performing not just at the bourse but in business in general.
GOBankingRates likewise mentions investing in overseas stocks (which Spiking has also discussed in a previous post) as a form of diversification to protect against country-specific risk.
How can I get off to a safe start in the stock market?
- Learn about what you can invest in. It’s important for you to know exactly what you’re putting your money into and where it might be going. Know what the fancy investment terms mean, like “shorting a stock”, “large cap” or “low-correlation assets”. And, “if it’s too hard to understand”, like Warren Buffet says, “maybe you shouldn’t invest in it.”
- Try investing just a little amount in stocks to start with. Don’t start by “putting it all on the line”, as it were, and be ready for the possibility that you might lose it all. That little amount should also be money you won’t be needing urgently.
- Diversify your portfolio. You can do this with low-cost exchange-traded funds (ETFs) and index funds. Not only will you lessen your costs, you will also lessen your risk.
- Invest over time instead of trying to beat the market. It’s a good idea to set aside part of your paycheck to make regular investing a habit. When you try to find “that perfect time” to buy or sell, you might end up doing so at a less-than-perfect moment.
- “Motif” investing can also help mitigate risk. Also known as “concept-driven investing”, an example of motif investing is buying stocks of a selection of tech companies. You might also only buy stocks from ethical companies, or companies that are committed to the environment. Buying stocks “because you believe in them” is also a method of diversification, and therefore of spreading or minimising risk.
Any more strategies for staying on the safe side?
There is no shortage of coaches (and courtside reporters) for investors trying to avoid risk. Here are ten relevant and recurring tips and tricks compiled from the Wall Street Journal, GOBankingRates and USNews.
1. Embrace your risk-averseness. This may seem obvious, but many investors think they can handle volatility — until their favourite stock spiking, spikes toward six instead of 12 o’clock. Then they make rash investment decisions they may regret later on. That said, it is advisable to accept one’s level of risk tolerance and not to deviate too much from it.
2. Calm down before you commit. Figuring out what to do with your portfolio should always be done calmly, and not as a knee-jerk reaction to what you saw 10 seconds ago on Bloomberg.
3. Make an investment plan. Having a plan which clearly defines your investment goals can help you keep calm in the face of market volatility and other unforeseen circumstances affecting your portfolio. Even just knowing that you having a plan in place for when these circumstances arise is reassuring.
4. Get advice from a good financial planner. This is especially important for investors who are not only risk-averse but also nervous, as the financial planner will be a big help in making calm and sound investment decisions regardless of what state the market happens to be in.
5. Keep track, but don’t stay stuck. Being glued 24/7 to the stock market news, ticker tape or whatever means you choose for getting updates, might only make you (more) paranoid. Monitor the market, and your portfolio by all means, but make sure your surveillance is within reasonable bounds.
6. Don’t keep looking back. Inversely, some investors are fixated on what they or the market did before. Instead of making past market performance as a benchmark for decision-making, this excessive backtracking behaviour can make an investor too cautious about certain stocks, causing them to miss out on investment opportunities.
7. Don’t invest money you know you will need. Determine how much money you need to keep “safe” for expenses such as your home, car or kids’ education — and keep it out of stocks. That way, you can rest easy no matter what happens on the mainboard.
8. Dollar-cost averaging is a great way to go. Experts say dollar-cost averaging is a good way for conservative investors to invest in the stock market. This is when you set aside a fixed part of your paycheck for investing in stocks on a fixed date every month. When the time comes, you buy as many shares as that fixed amount will allow.
9. Own fewer stocks. Investors with low risk tolerance are better off owning just enough stocks whose risk is at a level they can handle both financially and emotionally. In this light, it is also advisable to to just sell any stocks that make you lose sleep.
10. Being conservative doesn’t mean steering clear of stocks. Ironically, in your zeal for avoiding the risks that come with investing in stocks, you might just end up with a portfolio chock-full of high-risk bonds. Even a very modest stock allocation added into your portfolio mix can help boost its overall returns without boosting its overall risk.
Play the market safely with Spiking
In a way, Spiking was founded precisely to help play-it-safe investors. The pre-Spiking Singaporean stock market scene was rife with rumour and speculation, which all too often formed shaky bases for investment decision-making. To give investors solid, factual information to base their decisions on, Spiking created a platform to consolidate and send investors the data they need straight from the Singapore Exchange itself.
Spiking tracks and verifies the buying and selling activities of more than 8,000 sophisticated investors. A risk-averse investor can then use Spiking to receive up-to-the-minute disclosures being made at the SGX by these bona fide investors as well as publicly listed companies. Planning your investments based on Spiking’s verified information is decidedly much safer than putting your money on unfounded gossip.
Discover how Spiking can be a conservative investor’s best friend — visit the Spiking app homepage today.