Five ways to minimise the risk of losses on your investments

Many investors hesitate when it comes to investing in equity funds and ETFs because they want to wait for the perfect time to start. But there isn’t one. If you want to invest disposable funds, the following five tips will help you reduce the risk of losing money on your investment.

# Invest long term – ten to 15 years

You should choose as long a time horizon as possible between ten and 15 years for your investments because the stock exchange is constantly fluctuating. No one can see into the future, of course, but with a long investment horizon, you can avoid losses and build wealth. The return on a lump-sum investment in a global index like the MSCI World Index, for example, over a period of ten years (2012 to 2022) was around 154 percent. In contrast, making the same investment in 2022 only would have resulted in a loss of around 19 percent.

# Consider different sectors and regions

You can also minimise risk by diversifying your investment. The rule of thumb for novices: the broader, the better. Which is why investing in funds is a good idea because they cover different businesses, sectors and regions. But don’t just focus on investments in one particular country or in one specialist area. This could result in your investment being subject to sharp fluctuations. These kinds of equity funds and ETFs are more suitable as part of a mix of investments.

You can also achieve broader diversification with a higher number of securities from different businesses. The name of the index often provides a clue as to its size. An ETF on the Euro Stoxx 50, for example, is linked to the development of the 50 shares contained in the index. While an ETF on the US S&P 500 index contains 500 shares.

# Consider a savings plan instead of a one-off investment

If you set up a savings plan for an equity fund or ETF, when you start saving is not that important. While you risk losing out if you make a lump-sum investment just before the price goes down, this is unlikely to happen with a savings plan. The losses you might incur with a lump-sum investment will not occur to the same degree with a savings plan because you won’t have invested the entire savings amount yet. In fact, you can take advantage of the lower price to buy up shares more cheaply. Calculated across the entire period, you get a more favourable average price (cost average effect).

# Determine your risk appetite and chose the appropriate fund

As a rule, equity funds and ETFs that track large companies are less risky than those with lots of smaller companies. This is because the larger companies are often better able to compensate for turbulent economic phases. So, ask yourself the following question: How well can you cope with market price fluctuations?

You should also consider how much risk you can afford to take. Since our emotions often influence our investment decisions. It is not always easy to determine our own appetite for risk and to act accordingly. It can often be beneficial to get advice from experts. A good adviser will take into account your personal and financial situation and will help you compile your personal risk profile based on your knowledge and experience, your wishes and goals.

Choose your funds carefully. Some funds contain only bonds or are based on shares. There are also mixed funds and ETFs whose portfolios consist of bonds, shares and, for example, commodities. Each of these investment classes has its own features that have an impact on risk.

# Start preparing to exit your investment three to five years in advance

In particular, the timing of your exit from the investment has an impact on your returns. While you can ‘ride out’ losses at the beginning or in the middle of the term and take advantage of the opportunity to invest more at favourable prices, this will no longer be possible at the end of the term, reducing the amount of wealth you’ve saved up.

So, if you know you need the money at a particular point in time, you should make sure you’re prepared. Reduce the risks in your investment three to five years before you plan to use your money.

And remember: the more risk you have, the better and earlier you should start preparing your exit strategy. You can do this by gradually selling your riskier positions or by shifting your money into more conservative investments.