6 Steps To Take To Reduce Investment Risk

Investing

6 Steps To Take To Reduce Investment Risk

When it comes to investment risk, you can hardly avoid bad investments. But when you occur one, when do you need a wealth manager?

Published on 4 June 2015

When it comes to investment risk, you can hardly avoid bad investments. But when you occur one, when do you need a wealth manager?

Financial losses and investment risk, like sickness or injury, are inevitable facts of life. Even the most cautious people will make mistakes – and ironically, successful people often make a lot more mistakes on their way up. You can never avoid bad investments. What matters is how you respond to these losses, and whether you have the right insurance:

Document Everything for Your Insurer

Keep track of all the e-mails, receipts, letters, etc. involved in your loss. For example, if your identity was stolen and the thief maxed out your credit limit, you need to keep all the correspondence with your bank, the police report, bills incurred from transactions, etc.

This is to help insurance claims. In the event of identity theft, for example, you could have hard time making a claim if you do not have the record of incurred losses, or don’t have the police report (particularly if you lost your credit card overseas, and reported it to a foreign police force).

Your wealth manager and insurance agent need to be updated every step of the way, so they can tell you what documents you need to ask for. Keeping them in the dark can result in serious inconvenience later. Even worse, it might lead to a claim being denied.

Impose a Cooling Off Period

When you lose money on a bad investment, there’s always a strong temptation to “make it all back” as fast as possible.

You can observe this trait in failed gamblers: when they lose due to a bad hand, they often make an even bigger bet on the next round. They’re hoping to “recoup” the previous loss, and the usual result is to make their losses even worse.

The same mentality often afflicts stock traders, scam victims, failed venture capitalists, etc.

The time we are most likely to make a bad investment is during the panic following a previous bad investment. Poor decisions form a chain, like falling dominoes.

In order to break this pattern, always give yourself at least a week to cool off after a serious loss. During this time, do not trust yourself to make new investments.

You should also refrain from selling decisions in this time.

With the loss of assets such as property or jewellery (through theft, natural disasters, etc.) a common and destructive reaction is to be angered by it, and decide to “quit this game” in a spectacular way.

For example, a landlord may find her property destroyed in a gas explosion, which her insurer then refuses to cover. The aftermath of a court battle – which she loses – could result in an angry decision to sell off her remaining property assets, because she has “had it” with the property game.

While that might be emotionally satisfying, it is seldom financially prudent.

Investing, Investment, Investment risks, empty pocket, man

Re-Work Your Financial Goals

Take this step either
(1) after a week has passed, if you are doing it on your own, or
(2) if you have a qualified wealth manager or financial advisor to work with.

Do not attempt to make drastic changes immediately following your loss, as you will almost always be influenced by emotional fallout.

Reworking your financial goals will involve:

  • Adjusting your expectations for long term goals, such as retirement
  • Changing your estate planning; you may have to leave less for your children as you may now need the resources for yourself
  • Changing your investment horizon (the time taken to reach specific goals
  • As a last resort, abandoning some of your less critical goals (e.g. wanting to own “passion” assets such as collectible cars or historical but low-yield properties)

A good wealth manager’s feedback is critical – they can help you determine, which parts of your goals are still attainable. We can put you in touch with one for free; just use our quick questionnaire.

Learn from It the Right Way

Learn from your mistake, but do it the right way. Rather than try to pinpoint the cause failure, ponder what safety measures you could have taken, and will take next time.

Why shouldn’t you worry too much about causes and explanations?

Because with few exceptions (e.g. outright scams), it is usually difficult to pinpoint the exact cause of financial losses. Even an army of analysts only have generalised opinions about what caused the 2008 Global Financial Crisis, for example.

It can be just as hard to tell why (apparently) prudent investments sometimes go wrong. So don’t create a thousand narratives about “why” it happened – you could just be brewing false assumptions.

Focus instead on safety measures you could have taken. This includes:

  • Planning for the potential loss (hence affecting how much you will invest next time)
  • Guarding your expectations, to avoid emotional trauma when a “stable” investment fails
  • Implementing stop losses
  • Looking for better guarantees or damage control measures before investing (e.g. a fund which imposes a clawback if the manager crashes it)

If the financial loss was caused by something accidental, bear in mind that it could have been prevented by insurance.

For example, you can get your portfolio insured for a fairly reasonable premium, which would minimise the impact of sudden downturns. Even loans can be insured – for a small sum, an insurer will pay them off if you are suddenly unable to. So if you lost money on something you must do regularly, learn from it and insure it this time around.

Speak to your wealth manager to find the best priced insurance options.

Investing, Investment, Investment risks, empty pocket, man

Be Ready to Let It Go

While you spend time mourning the loss, others are already chasing the next buck. You should do the same: it’s better to start rebuilding than to mope about the rubble.

Remember that if you earned the money once, you can probably manage it again.

Above all, consider that attempts to recoup your lost money (e.g. by trying to sue a scammer who is already bankrupted) may be a waste of time, and just aggravate the costs.

Speak to your private banker about such issues – they will have legal contacts who can inform you on the viability of such attempts. Be ready to take their advice; if a lawyer tells you it’s not worth pursuing, you are better off letting it go.

Your mistake may have knocked you down, but don’t let it keep you there.

Rebalance Your Portfolio

This is the last step you should take, once the trauma and shock are over. You will want to rebalance your portfolio by:

  • Matching it to your new financial goals (see step 2)
  • Eliminating assets similar to the ones that cost you, and trying out alternatives. This is also good for your peace of mind.
  • Changing the person tasked with handling your portfolio

Changing wealth manager or financial advisor is important if you feel their (mis)guidance played a large part in your loss. If you’re worried about the awkward conversation this involves, you can also contact us. We’ll guide you through the process, and help to ease the transition from one manager to another.

Don’t stew about major financial losses on your own – not only is stressful, it’s a source of dangerous decisions. Reach out for help right now.

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