Follow these six steps to avoid taking too much risk while investing

Strategy to avoid risky speculation when investing For example, if you don't understand the investment product, then don't invest. Dont put in your hard-earned money just because others are earning high returns. There is a difference between investing and gambling

Here are a few steps on how investors can strategise and protect their investments from risky speculation.

Limit allocation to high-risk products

Assign a fixed percentage of your investible surplus, say 10-20%, to risky options like derivatives or penny stocks. This should be the amount you are willing to lose without impacting your financial goals. Don’t use personal assets for high-risk, high-return options.

Also read | Are you investing or gambling? How you can avoid losing money to risky investment choices

Set stop-loss safeguards

Whether you are investing in penny stocks or options, don’t ever breach the stoploss limit you have set for yourself. This discipline is crucial for not slipping into the gambling mode.

If you don’t understand, don’t invest

Do not invest in a product you know nothing about and have not researched. Don’t invest just because others are earning high returns. For instance, not many people understand how cryptocurrency works, but invest as they have heard others making a quick fortune.

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Also read | Warning signs for investors: These cognitive biases may lead to gambling

Don’t chase losses

The quickest way to slip from investing to gambling is trying to redeem compounding losses. The minute you breach your stop-loss limit, cut your losses and quit. The longer you stay, the bigger your losses.

Know your personality, automate

If you realise you are impulsive, emotional and love risks, automate your investments so that personal intervention is minimised. Go for mutual funds via SIPs, instead of day trading. Set boundaries, be it in amount invested or losses you’re willing to incur. Diversify investments, instead of only investing in crypto or penny stocks.

Have an emergency fund

A big reason for people resorting to get-rich-quick investing options is a sudden financial emergency or distress. A contingency fund can usually take care of such dire situations without the need for high-risk investments.

This story originally appeared on: India Times - Author:Faqs of Insurances