Do you want to be rich investing in stocks? Do you want to invest with a piece of mind? Investing stocks involve risks. A successful investor must learn about the different types of investment risk and how mitigate them. A great way to do this is investing in dividend paying stocks.
What is RISK? Most people define risk as the possibility of losing money. The better definition is ? ?Risk is NOT KNOWING what you are doing.? Therefore, before investing you should know the type of risks involved and how to mitigate these risks. Please remember, you cannot avoid risk all together. You can only reduce your risk by investing sensibly for the long term through stocks that pay dividend.
Some of the major risks are discussed here. There may be other risks which are minor.
1. Economic risk. Economy down turn will affect stock market prices. Most of the prices will go down and cause your investment to lose value.
How to mitigate this risk ? always invest in Fundamentally Strong dividend paying companies. This is a defensive mechanism. Having passive income during bad times will help you to have patience and control your emotions. In the end prices will rise once the economy improves. Please remember the main of investing is not to lose money. Most wealth is made over the long term.
2. Sector risks. The sector that the companies are involved may have a downturn, such as the housing and financial sector recently. In these situation the all the companies in the sector will have problems. This is a good opportunity to invest as most companies will rebound.
How to mitigate this risk ? Always invest in companies after studying the fundamentals. Invest in fundamentally strong companies. Look for companies with strong history of dividend payments. Even if dividends are interrupted, this will be only for a short period. Strong companies will rebound quickly and will start paying dividends again.
3. Company risks.
Companies can have temporary down turns due to various reasons or become bankrupt.
How to mitigate this risk ? this risk can be mitigated through proper study of the company before investing. Many companies are good. Dividend paying companies are better. Dividends are paid only when the company is sure of its future. You can also mitigate this type of risk via diversification; make sure all the companies pay dividends consistently. Investing in a variety of stocks helps you reduce risk as not all companies will have a downturn or become bankrupt. With experience, you will learn which good company to invest in is and what a lousy company to avoid is.
4. Inflation
Inflation is fact of life. This cannot be avoided.
How to mitigate this risk ? investing in dividend paying will help you fight inflation. Strong companies can increases prices and as a result earn more money leading to a strong possibility of increased dividend therefore your passive income money will also grow and will beat inflation. Also as you hold the investment over the long term the prices are likely to stock is likely to rise giving you dividend income and as well as capital gains.
5. Interest rates
Raising interest rates can cause big problems for companies who are too heavily in debt.
How to mitigate this risk ? invest in fundamentally strong companies have little or no debt. Companies with little or no debt will always be able to pay dividends thereby ensuring the continuity of your passive income.
6. Major changes in the tax code
Tax is another fact of life. It cannot be avoided. The tax rates on dividend income can increase. I am not a tax expert. Please consult with your tax expert as to your country?s tax policy.
How to mitigate this risk ? unfortunately, there is really no way to mitigate this risk. Hopefully, the government will realize that by increasing tax rates, it is encouraging people to take unnecessary risk as most investor will turn to short term investing for capital gains. This is not good as history has shown dividend paying companies have increased in value more than non dividend paying companies. So let us hope the government will come to its senses and have policies which will encourage long term investing.
7. Your Emotions
Your emotions can play havoc with your thinking. It does not matter if the market turns down or goes up. Your emotions will work to either create panic or a sense of euphoria. When the goes down you will panic and sell causing losses. When the markets go up you will want to buy to higher prices giving you less dividend yield and capital gains. Your emotions will not let you think through the situation properly. This can create a big loss for your portfolio.
How to mitigate this risk ? it is important to invest in fundamentally strong companies. Also, it is important to invest in them at the right prices. If after analyzing the companies and you are comfortable to invest in them and prices goes down you should invest more money in them. If at a higher price the company made sense, and then why not buys more at lower prices. If the prices goes up you can always decide if buying more makes sense or just keep holding the investment. Remember fundamentally strong companies will always be successful. You will always be paid dividends as passive income. Do not panic. Be calm.
In conclusion, do your homework. Understand risk involved in investing. Analyze companies. Choose fundamentally strong companies who pay dividends consistently. You will achieve passive income; increase your net worth and financial freedom. Most important you will live a stress free live and you will enjoy life.
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