13 Easy Ways Novice Investors Can Manage Risk

More than half (56%) of the adult U.S. population invests in the stock market -- even though it comes with the risk of losing money. They do it for the potential gains, which are many times over what you can earn in a cash savings account.

Still, the risk of investing should not be taken lightly. You can and should take steps to keep your money as safe as possible. Fortunately, there are several risk management moves easy enough for any investor to implement.

Read on to learn 13 novice-friendly strategies to help you manage the risks of investing.

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Knowing yourself is the first step to mitigating risk. When you understand your own tolerance for volatility and potential financial losses, you can define an investment strategy that's appropriately aggressive (or conservative).

If you are willing to risk a bigger loss for higher earnings potential, you have a healthy risk tolerance. If you'd rather accept lower earnings potential to keep your money safer, you are risk averse.

Spend some time reflecting on what you can handle in terms of risk. You might think through how you'd feel to see your portfolio lose 20%, 30%, or 40% of its value, for example. That analysis helps you define how much stock exposure you want, relative to less volatile assets like cash.

ALSO READ: What's Your Investment Style? Take This Risk-Tolerance Quiz to Find Out

The stock market goes up and down from one year to the next. But over longer time frames, those ups and downs balance out to growth. Specifically, the stock market's long-term average annual growth rate is about 7% after inflation.

To avoid getting caught in those short-term ups and downs, you must stay invested longer. This is why experts recommend only investing money you won't need for at least five years. Stretching out your timeline to 10 or 20 years is even better. On those timelines, you have a good shot of realizing that market-average 7% growth rate.

An asset class is a set of investments that respond similarly to external factors. Stocks are one asset class, and the shared behavior is clear anytime the market goes up or down en masse. A disappointing economic report, for example, can cause many stocks to lose value at the same time.

Bonds, real estate, and cash are also asset classes. Each responds in its own way to economic and financial market news. Bonds, for example, can rise as stocks are falling.

Combining assets that have different response patterns helps you avoid the situation where all your assets lose value simultaneously. Ultimately, this means lower volatility in your portfolio.

ALSO READ: All About Asset Classes and Investment Diversification

Diversifying within asset classes also reduces volatility. Own one stock and you could see wild movements in your portfolio's value every day. Own 20 stocks across different economic sectors, and you'll see a smoother trend line.

Investing in exchange-traded funds (ETFs) is a simple way to diversify -- both across and within asset classes. ETFs are funds that trade throughout the day, like stocks.

ETFs do pass along their administrative expenses to shareholders, which is a downside relative to owning individual stocks. Keep your fees low by choosing ETFs with low expense ratios.

Dollar-cost averaging is the practice of investing a set amount periodically. Investing, say, $200 monthly rather than $2,400 once a year greatly reduces the risk you'll buy at a stock's peak share price.

Even better, the practice keeps you buying when share prices are falling. That lowers your cost basis over time. Since gains are the difference between your cost and the market value of those shares, a cost basis that's lower sets you up for higher returns.

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Cash on hand is the unsung hero of any investment plan. Here's why. When share prices fall due to economic or financial market cycles, the trend is temporary. Throughout history, economies and markets have recovered from those down cycles, without fail.

If you hold your investments through the downturn and wait for the recovery, your unrealized losses eventually reverse. On the other hand, if you sell shares in a downturn, you lock in those losses. You also take yourself out of contention for recovery gains on the shares you sold.

Cash protects you from that situation. Keep enough cash on hand to survive an emergency, so you don't have to tap into your investment account at the wrong time.

ALSO READ: What Is an Emergency Fund and Why Do You Need One?

Rebalancing is the process of resetting your portfolio's asset mix. Say you've decided to invest in a conservative portfolio that's 60% stocks and 40% bonds. Over time, the value of the stocks will rise. As that happens, your asset mix will shift. Unchecked, your stock percentage could go up to 65%, 70%, or more.

As your stock percentage rises, your portfolio will get riskier and more volatile.

To rebalance, you'd sell off enough stocks to return to your targeted 60% exposure. You'd then use the proceeds to buy bonds. Doing this periodically will keep your risk from rising beyond your comfort level.

All stocks come with a risk of loss -- but some are more likely to lose than others. Smaller, younger companies with inexperienced leaders or debt-heavy balance sheets, for example, are more likely to fail than blue chip stocks.

Blue chip stocks are large, mature companies with proven track records. You know them by name and are possibly a user of their products. Apple, Coca-Cola, and Walmart are examples. These are quality stocks with leading positions in their industries.

Blue chips are among the lowest-risk stocks available. They don't grow as fast as younger, nimbler companies, but they don't fall as hard, either.

ALSO READ: Investing in Quality Stocks -- Made Easy

Investing in what you know allows you to make better, quicker investing decisions. A quicker decision to walk away from a stock, for example, can mean the difference between a small loss and a big one.

To identify stocks you know, think about the products you use regularly or the stores you shop. Maybe you're a die-hard Apple user, for example. Your perspective as an Apple consumer is valuable -- it can help you evaluate the company's strategic plans as good or bad. That makes you a more effective shareholder.

You can invest in a low-maintenance kind of way. But you shouldn't plan on no maintenance. At a minimum, check in with your portfolio quarterly.

These check-ins aren't for you to make big moves. They're for you to decide if you're comfortable with your risk level. As a novice investor, it's hard to predict how much risk you want, so you may need to adjust your strategy as you gain experience.

Aligning your investment strategy with your risk tolerance is critical. Too much risk and you're prone to investment panic. Panic commonly pushes you into regrettable trading decisions. Too little risk and you may be leaving money on the table.

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If diversifying, setting an asset mix, and rebalancing all feels like too much, you can always delegate those tasks. You'd do that by investing in a target date fund or a target balance fund.

Target date funds invest in a strategic mix of stocks and bonds. Since these funds are primarily designed for retirement savers, the asset mix changes according to your expected retirement year. The fund follows an aggressive strategy when retirement is decades away. As your retirement date gets closer, the asset mix gradually gets more conservative.

Target risk funds also hold stocks and bonds. These funds pursue a consistent risk profile over time. Depending on the fund's strategy, the risk profile can be aggressive, moderate, or conservative.

Billionaire investor Warren Buffett said, "The most important quality for an investor is temperament, not intellect."

Staying calm is your best defense against emotionally driven decisions. For investors, high-emotion decisions often turn out badly. A common example is selling your stocks when the market is falling.

The intention here is good -- you want to avoid bigger losses. Unfortunately, this strategy often backfires.

When you liquidate in a down market, you end up with cash and realized losses. By the time you feel comfortable getting back into stocks, share prices will be much higher. Buy back in and you will have traded a cheaper portfolio for a more expensive one.

Staying calm enough to wait for a recovery generally works out better. Your portfolio remains intact and you're poised to gain when share prices start rising.

ALSO READ: How to Stay Calm When Your Stocks Are Dropping

Know more and you'll make better investing decisions. You're also likely to find investing more interesting when you have direct knowledge to apply.

You might start by learning the landscape of index ETFs. ETFs often make a better entry point for novice investors than individual stocks.

You could also learn more about the asset classes and how they behave. That'll help you formulate a solid diversification strategy.

Managing your risk is critical at this stage of your investment journey. Big mistakes early on can take you out of investing entirely. Limit yourself to smaller mistakes and you'll learn, refine your approach, get better results, and -- importantly -- stay on the wealth-building path.

So, for now, diversify. Invest consistently in quality businesses you understand. Maintain a cash balance, just in case. Monitor, adjust, and stay calm. These simple moves will keep you in the investing game and on the path to financial freedom.

Catherine Brock has positions in Coca-Cola. The Motley Fool has positions in and recommends Apple and Walmart Inc. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola, long March 2023 $120 calls on Apple, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.