Many investors are afraid to take risks due to concerns that the risk won’t pay off and they will lose money.
However, finance expert and famed author of “Rich Dad Poor Dad” Robert Kiyosaki wrote on his blog that it’s possible for investors to manage risks instead of avoiding them. The key is having the right tools and knowledge to do it.
Here are the five tools every investor needs to manage the risk involved with their investing efforts.
Reward Risk Ratios
According to Kiyosaki, having reward risk ratios gives investors a better understanding of how much they may gain for every dollar risked and a clear picture of this balance. Having a higher ratio hints that you may receive bigger rewards.
The one thing every investor needs to do, per Kiyosaki’s recommendation, is define their reward risk ratio and stick to it.
Stop Loss Orders
How will you cut your losses as an investor? The next item needed in your financial toolbox to help you figure out an exit strategy is a stop loss order for your stocks.
Stop loss orders are predefined exits in the stock market that automatically trigger a sale when a stock hits a certain price. Once you predetermine your risk threshold using reward risk ratios, Kiyosaki said you can set stop loss orders. This allows you to start investing with a clear and calm mindset. As a nice aside, it’s now possible to automatically set a stop loss order on most trading platforms.
Protective Puts
Protective puts act as an insurance policy for an investor’s stocks. When an investor buys them, they secure the right to sell a stock at a specified price. Kiyosaki said this helps guard one’s wealth against sudden market downturns.
Position Sizing
Most investors do not want to put all of their money into one specific investment. By using position sizing, Kiyosaki said, you can decide how much of your portfolio you want to allocate to a certain investment.
Doing so helps investors avoid damaging their financial health and better manage risk while ensuring sustainability.
Hedging Strategies
The last tool in an investor’s financial toolbox is its anchor: hedging strategies.
To mitigate risks and confidently navigate through uncertainty, hedging strategies involve making investments that help offset potential losses from other assets. Essentially, this keeps any one risk from dominating your portfolio and allows you to create balance, according to Kiyosaki.
More From GOBankingRates
Read More: ‘Rich Dad’ Robert Kiyosaki: Use These 5 Key Tools for Managing Investment Risk