When stock markets are down, people often say “investing in shares is too risky for me.” I can understand that. But over the years I’ve been investing, in my Stocks and Shares ISA and my Self-Invested Personal Pension (SIPP), I’ve prioritised my own three key ways to avoid risk. It’s nothing new, just my personal approach to common risk-reduction strategies.
Not buying risky shares
Just saying I don’t buy risky shares isn’t really all that helpful. But there are a couple of specifics I steer clear of. Is it a popular new growth stock that everyone is talking about? Has it been flying for months as the punters pile in? I’ve seen plenty like that crash and burn over the years.
That doesn’t mean I won’t ever buy any highly-priced growth stocks. I have some Boohoo shares, for example. But it took me years to decide to go for them, and only when I finally thought I had a decent grip on their valuation.
When investing in shares, something else I’ll never do is buy at an IPO. When a company floats on the stock market, its private owners aren’t trying to offer us a bargain. They’re trying to maximise their own profits. So they’ll pick the timing and the pricing to suit themselves, not us. No, I’ll only buy on the open market when investors have had enough time to weigh it up properly.
Diversifying my holdings
Diversification is nothing new, but I’ve always had a problem with it. The thing is, I can never find the 15 or so stocks that experts seem to think is a good number to spread the risk. My 15th favourite is never going to be anywhere near as attractive as my first choice. And I won’t dilute the quality of my holdings just to diversify.
I could put some money in an index tracker, and I rate that as a very good option. But these days, my favoured diversified approach to investing in shares is via investment trusts. Currently, I hold City of London Investment Trust, which diversifies its investments across a wide range of shares. And I only have to keep a track of one investment, in this case one that’s raised its annual dividend every year for more than 50 years.
Investing in shares for the long term
This is one where I don’t really have a personal take at all, I confess. But I think it’s so key to share investing that no discussion on risk could be complete without it.
The 2020 stock market crash did make investing in shares look very risky. At its lowest point, the FTSE 100 had fallen more than 30%. And the FTSE 250 touched on a 40% loss at one stage. But we’ve had plenty of stock market slumps over the years, and they all have something in common. In every single case, the stock market recovered and went on to greater gains.
The Covid crash isn’t over yet. But even though we’re only about a year on from the first coronavirus cases, the FTSE 100 and FTSE 250 have recovered to much softer falls of around 12% and 6% respectively.
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Alan Oscroft owns shares of boohoo group and City of London Inv Trust. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.