THE BLOG
04/25/2016 11:36 am ET Updated Apr 26, 2017

5 Ways You Can Protect Yourself from Risky Investments

If you've been an investor for some time now, chances are you already have an idea about how this whole investing thing works. You know what investment risks are and you have an understanding of how some types of investments present more risks than others. But aside from understanding the basics, the most important knowledge you should arm yourself with is how you can protect yourself from risky investments. This is crucial in making your investment portfolio grow and here are five ways you can continue investing (and growing your portfolio in the process) without falling for investments deemed too risky.

1. Study the investment risks and returns.

When you invest in stocks and bonds, you'll lose money when the funds decline in price. There's always that risk that's why it only makes sense to study the percentages of how much your portfolio will grow or shrink depending on the investment you make. Once you have a full grasp of this, you can then decide whether it's worth putting your money in stocks, bonds, or both. Of course, there's always a chance that you'll lose over the investments you make since you can never predict the future but when you study the risks involved, you'll be more likely to manage your portfolio.

2. Learn how to measure investment risks.

As an investor, you should learn how to measure investment risk. You can do this by looking at the percentage your portfolio drops in value. First, determine the starting and ending value of your investments then find the difference between the two. Lastly, divide the results you get by the starting value of your investment. This will help you see the investment risks so you can decide whether you should proceed investing.

3. Be on the lookout for investment frauds.

You might have heard of how Wall Street has pumped risky oil and gas products to investors in the past. Since many investors have struck it rich by investing in oil and gas, others who are frustrated with the volatility of the stock market turn to it in the hopes of striking it rich, too only to find out that they've been scammed. So before you jump in to it, do your research to avoid falling prey for these ventures.

4. Learn the other kinds of investment risks.

You might have heard of systematic risk (market risk) and unsystematic risk (firm specific risk). Market risk happens when a natural disaster or cyclical recession hits, making this kind of risk unavoidable. Firm specific risks only impact a specific firm and not the entire market. You can reduce this risk by holding a diversified portfolio.

5. Diversify your portfolio.

The truth is at one point or another your investments will drop in value. If you don't want to deal with volatility, you'll be better off sticking to cash and government I bonds. However, you can't expect higher returns from these. Stocks and bonds offer higher returns but they present higher risks, too. Despite that, if you still wish to invest in stocks and bonds, you can minimize the risk of volatility and protect your investments in the process by placing them in a diverse mix of bonds and stocks or what is commonly known as diversification.

Growing your investment portfolio doesn't happen overnight. Yes, it's a gamble with inevitable risks but by doing your homework and following this guide, you'll be able to minimize the risks and protect yourself from risky investments. After all, your biggest investment risk is you.