How investors save finances in a crisis: approaches to diversification, selection of low-risk assets and cost optimization

Picture: Unsplash

Protecting investments, minimizing risks and possible losses is the main topic that has occupied investors around the world in recent weeks. In today’s article, we will talk about what approaches to solving this problem can be used, and what important points should be taken into account.

Diversification is very important

Diversification is an approach in which an investor forms a portfolio containing a wide range of various financial instruments and assets of different classes. This allows you to reduce the unsystematic risk that arises when investing in a particular company – in contrast to the systematic risk that arises when investing in specific markets as a whole.

Key ideas for creating a well-diversified investment portfolio:

  • Need to use various types of assets – stocks, currency, ETF, etc. At the same time, it is also possible to diversify within the framework of asset classes – for example, not to invest in shares of only companies from one industry.
  • Rebalancing periodically – the market situation is changing, different types of assets or instruments within the same type are starting to show different results (for example, the current situation with coronavirus has affected many industries, but there are segments that are growing). It is worth considering all these factors and regularly rebalancing the portfolio.
  • When compiling a portfolio, it is important to consider associated costs – when choosing tools and assets for investments, it is important to understand what commissions will need to be paid when working with them. Also, when rebalancing, it is worth considering the tax burden – if you decide to sell some stocks that are still growing in price and buy new ones instead, from the point of view of the tax service, this will be a profit-taking, which means you will have to pay taxes.

Read more about diversification of the investment portfolio in this article.

It is necessary to choose an investment strategy in accordance with the psychological profile

People come into investing, having behind them life experience, psychological patterns, habits and inclinations. All these factors must be taken into account in order to accurately determine your risk tolerance and, in accordance with this, choose an investment strategy.

There are several basic psychological profiles of stock investors, we wrote about them in this article. In accordance with them, in periods of uncertainty and stock market collapses, one of the investment strategies can be chosen. Cautious investors are more likely to prefer a defensive strategy. It implies initial investments in larger companies with a stable position, a serious history and good income. Typically, the stocks of such giants suffer less during periods of market turbulence.

You can read more about strategies for behaving on the stock exchange in the conditions of falls here.

Low risk investment tools exist

In recent years, the investment sector has been actively developing, resulting in a number of low-risk instruments that are suitable for beginner investors.

For example, these include model portfolios. They consist of several securities selected on certain grounds (for example, bonds or shares of one sector of the economy).

Also a good option is investing in federal loan bonds (OFZ). This tool is issued by the state, and a refusal to pay coupon income on OFZs will be tantamount to default – with corresponding consequences for the entire economy. So such bonds are one of the most reliable assets that can be bought on the stock exchange.

Dividends and taxes are two other important factors.

One of the ways to get extra income with minimal risk is to buy shares of companies that pay dividends. According to statistics, the profitability of payments of domestic companies is at one of the highest levels in the world – about 6%. According to analysts, at the end of 2019, it amounted to 8%. This is significantly higher than the average 3% return on emerging markets and 2.4% on developed ones, including 1.8% in the US and 3.6% in Europe.

Not so long ago, ITI Capital analysts studied shares of companies that pay dividends, and selected a list of the top 30 issuers in terms of profitability / risk.

Do not forget that taxes can also be attributed to the costs of exchange trading. It often happens that incorrect calculations lead to situations in which profits from transactions are “eaten up” by subsequent tax payments. There are several legal ways to optimize taxation for stock investors.

  • Use of losses – if some shares from the portfolio fell in price during the year, and their price is below the level of purchase, then before the end of the year you can sell them and record a loss. This will reduce the total profit for the year, which means there will be less tax, and shares can always be bought later – if the strategy requires it.
  • Postponement of tax payment dates – The tax is withheld by brokers only when withdrawing money from the account. In this case, the broker compares the withdrawn amount with the total tax on the basis of the financial result for the year – this can be used for optimization.
  • Use preferential tools and deductions – There are several financial instruments, investments in which allow you to get additional benefits. These include preferential coupon bonds and securities of the innovative sector of the economy. There is also a tool like individual investment account, which provides the right to various benefits – including tax deduction.

Read reviews, market analytics and investment ideas in Telegram channel ITI Capital

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *