What are ways investors reduce risk?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 336.9 million views in recent years.

In the answers below I focused on the following topics and issues:

• What are ways investors reduce risk?
• Are we heading for a repeat of the 2018 stock market selloff?
• What are the best places for expats to live?
• What are five alternatives to cash for your money?

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Source for all answers – Adam Fayed’s Quora page.

What are ways investors reduce risk?

The best ways are simple

1. Understand that risk is inevitable.

Cash isn’t without risk. It is the riskiest asset as Ray Dalio points out here during a recent interview, due to inflation and devaluation.

Inflation is a 3%-4% per year tax on your savings. In 15 years, your money is worth about 50% of what it is today.

Inflation is therefore referred to as the silent killer of portfolios because it happens slowly but steadily.

So, you can mitigate risk but if you want to reduce it, you can’t sit on the sidelines.

2. Diversification

There are two ways you can achieve this:

• Asset diversification. The old adage don’t put all your eggs in one basket

Let’s give some examples. If you are 100% in Amazon’s stock, then you have all your net worth is only one stock.

In comparison, if you invest in the S&P500, you own Amazon and 499 other big American, and international, names.

That is better than holding say a South Korean or Taiwanese ETF, which although globally diversified, isn’t as international as the US stock market.

What’s more, 40% of the South Korean ETF is Samsung, so that is less diversified than say a worldwide ETF like MSCI World.

However, if investor two also has government bonds, real estate investment trusts, and other non-stock assets, they are even more diversified.

• Time diversification – put your money in over a long period of time

Many people understand the importance of diversification and therefore invest in many different assets.

There is one problem with this – it reduces the return in some instances even if it lowers the volatility.

Take Ray Dalio’s All-Weather Portfolio. It invests in gold, commodities, bonds, and stocks.

You can see it is less volatile than the S&P500, seldom going down for the whole year, but it doesn’t perform as well long-term:

The issue is, even though markets have always gone up long-term, especially if dividends are reinvested, they can be stagnant for a long period of time.

There have been plenty of “lost decades”, with 2000–2010 being the most recent example, in many global stock markets.

Therefore, if you invest for a very long period of time, and regularly inject in fresh capital, you are achieving time diversification:

Nobody has lost money by investing for decades in a diversified index like MSCI World or the S&P500.

There are more complex strategies as well, such as downside protection, but you often need advice on things like that.

Are we heading for a repeat of the 2018 stocks selloff?

Your question is fascinating because you remember the 2018 sell off. Few people do.

A bit like the “flash crash” about a decade ago which caused so many headlines at the time:

People, usually, forget about these things, and only remember the big ones like 2008 and 2020.

The simple response to your question is I am not sure. Nobody truly knows. If they did, market timing would work.

What I do know is

• 99% of people didn’t see the 2008 crash coming. From those that did, few made the right move after then. Most thought it would take years for the markets to recover
• Ditto 2018 and 2020. Most people didn’t see it coming and then got the next move right. Past predictions are no indication of future right ones
• Markets soar during the most unexpected moments, and can equally crash during very unusual times
• Far more money is lost worrying about stock market crashes than the crashes themselves. In fact, nobody loses money during a crash or correction unless they panic and sell.
• With interest rates being 0%, people are searching for a yield. Even conservative people
• If you are always fully invested, you get to reinvest dividends, which is a key component of growth. As soon as you sell, you don’t get those and often pay taxes and costs.
• People shouldn’t trade based on the news. We have, once again, seen that with this variant. Speculating on it won’t help at all.

So, I wouldn’t worry. These things do happen, and will happen again in the future.

Market corrections and crashes occur, but it doesn’t make it easy to consistently see them coming.

What is the best countries for expats?

That is very subjective, but some organisations like InterNations and HSBC have done surveys on expat satisfaction:

Of course it depends on your preferences, skills, language skills etc but I will come off the fence

For corporate expats with good jobs (in no particular order)

1. Singapore
2. Switzerland
3. The UAE
4. The US if you are paid enough to compensate for the taxes and associated hassles
5. The UK in certain industries like banking and some specific tech
6. Dublin, Brussels and Amsterdam in Europe for cities
7. Any “hardship” location if you just want to make as much money as possible short-term. Examples include Iraq if you work in oil&gas or international development

For location independent expats like retirees, some business owners and digital nomads

1. Thailand, Malaysia or Cambodia in SE Asia
2. Bulgaria, Greece, Portugal or Spain in Europe
3. Mexico, Panama or Costa Rica in the Americas
4. If you income is very high and you want to save taxes, then the UAE, Caymans or BVI.

Many other places could be added to the lists as well.

Preview 2022 is almost here. What are the 5 best investments to do than hold cash in the bank?

I wouldn’t focus on which investments will do best in 2022.

I would focus, instead, on which investments are likely to give the best risk-adjusted return if held for the long-term.

That will be things like:

1. The entire stock market even if some individual stocks do poorly
2. The whole real estate investment trust (REITS) market
3. In certain specific situations, direct real estate, although it is harder to make good money than people think
4. Private equity and alternative assets for people with a higher degree of wealth and risk tolerance
5. Some illiquid assets like fine art can also do well, but the returns aren’t as high as people assume.

Pained by financial indecision? Want to invest with Adam?

Adam is an internationally recognised author on financial matters, with over 666.9 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.