In 2007 it wasn’t too hard to make a fast buck on the stock market. Then in 2008 – things got a little bit trickier. And now, in 2009, there’s the very real risk that if you don’t invest wisely you could lose your life savings.

And that’s why this week I chatted to Jon Worth. He’s the analyst for Personal & Finance Confidential’s share portfolio and a good friend of mine. And over a cup of coffee, he revealed how to reduce investment risk (and still make money). And today I’d like to share his secrets with you too…

1. Diversify your portfolio. If you own a lot of shares in the company you work for, your portfolio is probably unbalanced. Think about whether you want to trust your personal wealth to the fortunes of a single company, particularly if the share scheme also forms part of your pension. Some Enron employees who had invested only in Enron shares in their company pension scheme lost everything when the company collapsed.

2. Balance your assets correctly. Your stockmarket portfolio must be balanced. If you are in your 30s, think about putting 50% of your money in shares, 25% in bonds, and 25% in cash. Between ages 40 and 60 your perfect portfolio would be 33% shares, 33% bonds and 34% cash. When you are thinking about retiring, it is a good idea to rebalance your holdings so you have fewer in shares and more in bonds and other fixed interest products.

3. Pay off your debts first. If you are paying 11% on a home loan, you won’t find any safe investments giving that kind of return at the moment. There is no point in investing if you have R12,000 of credit card debt. Pay it off as fast as possible.

4. Use a stop loss. When you see the value of your shares fall by 20% to 30% you should cut your losses and get out. So decide how much of a capital loss you are prepared to take and stick to a stop loss. If you are going to be away on holiday you can take the precaution of putting an electronic stop loss into your online trading account. If you have bought a volatile share – one that moves up and down frequently – then don’t set your stop loss too tight or you could be caught out.

5. Try a hedging strategy. When the market looks weak, try and hedge your portfolio with other more sophisticated investment options. For example, buy derivatives to cover your trading position, which you can use as an insurance policy if shares fall, or a warrant, which likewise gives you the right to buy or sell a share at a set time in the future without actually having to own it. If the share price falls, the money you make on the derivatives will compensate you for your capital loss. If the share price rises, you will lose the money you had put into derivatives, but still benefit from the rise in the stock market – so the warrant acts rather like an insurance policy premium.

6. Diversify across asset classes. Fund managers don’t like to put all their eggs in one basket, because they know that when one asset class (shares, for example) is doing well, there is no guarantee that others will perform the same. The professionals aim to have a spread of investments in types of investment that have no correlation to each other. So they might put a portion of their money in shares, some in property, and the rest in oil, gold, commodities and currencies. The advantage is that all these assets move independently of one another, so your portfolio won’t be hit by the failure of just one of them.

With sound advice like this I’m ready to brave the murky waters of the JSE again. Are you? Let me know – just pop me an email at: pascale@fsp.co.za.