ASX share rebound: how to reduce your investment risk

A strong recent rebound on the ASX doesn’t mask the fact that many risks remain. These five strategies can help reduce them.

Shares have bounced back strongly from their June lows, recovering a large chunk of the value they lost in the mid-year correction.

It spells relief for some shareholders, and may tempt others to dip a toe into the stockmarket.

Buying shares at any time is risky – just ask those who dived in earlier this year only to watch their investment in Aussie stocks plunge at least 15 per cent in just a few months, or more than 20 per cent – official bear market territory – in the case of US stocks.

Now may be more risky than usual. Economists and analysts warn of more potential falls as the world worries about surging inflation, interest rates, Russia and China. Then there’s rising interest rates – which make many shares less attractive because investors can also get decent returns from cash and fixed interest.

Shares have a stellar long-term track record, but short-term risks are real. Here’s how investment risks can be reduced.

1. DIVERSIFY

The best strategy to smooth out returns is to avoid putting all your eggs in one basket.

Investing across different companies, sectors and countries is a golden rule for share investors. But true diversification comes from investing in different asset classes including shares, property, infrastructure, cash and fixed interest.

2. AVERAGE IN

Also known as dollar cost averaging, this strategy sees you buying shares at different intervals – such as every three or six months – rather than going all in at once.

This means you won’t always be investing at the bottom of the market and grab the biggest gains, but you also won’t be buying at a peak only to watch your wealth sink sharply.

Most of us are always dollar cost averaging within our super funds, as regular employer contributions are used to buy assets at different times of the year and different points in market cycles.

Stockmarket moves can be dizzying, even for experienced investors.

3. USE A CASH BUFFER

The simplest way to stop all investment risk is to put everything in cash deposits, which are guaranteed by the federal government.

However, this means your money is effectively going backwards after the effects of inflation and tax, because current deposit rates near 3 per cent are well below the official inflation rate of 6.1 per cent.

Many investment specialists and advisers say the cash-only option over the long term is higher risk than holding a diversified balanced portfolio of assets. However, holding some cash is a good idea.

4. CUT DEBT

People who borrow to invest – most commonly for property and shares – multiply their risks because any falls in capital value hit them harder.

I was burnt badly during the GFC when I borrowed an investment property’s worth of money to buy shares, and promptly watched my assets halve while the giant loan stayed the same.

Any reduction in investment debt reduces financial risk, but for tax reasons it’s generally best to pay off all non-deductible debt first – including your mortgage.

5. EYES ON THE BALL

Most investments should be monitored regularly, at least monthly, just to check everything is performing in line with your expectations and the overall market.

That doesn’t mean you should make kneejerk decisions if a stock suddenly falls sharply. But it does give you a chance to investigate if any changes are likely to have a long-term effect on an investment or your wealth.

Originally published as ASX share rebound: how to reduce your investment risk