Contrary to popular belief, investment isn’t all about avoiding risk. In fact, investing anything at all is always a risky strategy, and there are no 100 percent guarantees you will get a positive return on your initial investment. It’s managing your risks that you need to focus on – and we’re going to take a look at the six steps you need to take to do just that right now. Read on to find out more in our guide to managing your investment risks like a pro.
Understand the concept of investment risk
As we mentioned above, investment isn’t about avoiding risk, as risk is something you will need to embrace whenever you invest in anything. Ultimately, the risk of investing boils down to one single factor: that you can’t pay for something that you need when you need it. This simple fact means that a bad day on the stock markets or a week of falling currencies is scary and feels terrible – but it isn’t a risk per se if you are appropriately leveraged across some different investment areas and products. Once you understand the concept, it’s easy to manage your risk in the best way possible – by following the next steps in the process.
Knowledge is critical
You should never invest in an industry or company that you don’t understand. Many failed investors follow the crowds rather than what they know, and because they don’t understand the industry correctly, it inevitably leads to disaster. Take the smartphone industry, for example. While you might have a rough idea of how many phones Samsung are selling each year, that info is not everything you need to make a judgment call. Instead, you need to know about the companies that Samsung buy from – who are they and where in the world are they based? What raw materials do they use, and what would happen if the world’s stock of that material – a precious metal, say – took a turn for the worst? It’s these snippets of information that investors need to know – the full picture, rather than the sales figures of any given year.
Develop skills in estimating
Ultimately, investing is all about making judgment calls. You are pitching your knowledge and ability to make a reasonable and insightful assessment of the markets. If the market appears to undervalue what you perceive as a valuable company, you are more likely to put your money where your mouth is, and hopefully, come out on top. It means you have to be sharp on your estimates and develop skills in perceiving the value of a company, industry, property or currency. The only time you should invest is when you can do so for a price lower than your valuation estimate – and that gives you a less risky margin of safety.
Widen your portfolio
Risk management is all about diversifying your investments. You can’t afford to put all your eggs in the same basket, as any adverse change to industry, market, or currency will ultimately take you out of the game. So, when it comes to choosing stocks, don’t invest all your money in one company – spread your wealth., Avoid choosing companies from the same industry, too. Look into the property market as well as buying into oil, and pick a variety of currencies to trade rather than a single one. A diverse portfolio is the foundation of every great investor’s strategy – so focus on widening your investments as much as possible.
The next step seems obvious, but many new investors fail to do it – create a set of targets. You have to ask yourself what you want to achieve by investing your money in all these different areas. Do you want to earn a modest living and be able to give up the day job? Do you want to secure a happy and comfortable retirement? Maybe you are investing to pay for your kids – or grandkids – college education? There are no rules for investment goal setting other than to set them – it’s that simple. Write everything you want to achieve down on paper, before sorting them into short, mid and long-term goals. Doing this will make everything a lot more achievable than aiming for your loftiest plans. Finally, work out how much money you will need to get started – and where you will be getting the funds from. Is it a savings account, for example, or are you moving money from one investment to another? Establishing clear goals is the only way to ensure you can track and measure your progress, and it will also keep you focused on what you need to do at every turn.
Review and revise
Finally, it’s important to understand that managing your investment risks is all about making little changes along the way – and it’s a long-term strategy that pays off. Investing in the long-term is always a safer approach than looking for short-term gains, but it’s vital to remember that your personal circumstances can change all the time – and you need to adapt your plans as you go along. Therefore, it’s critical to review your portfolio on a regular basis. Don’t forget that past performance is no indicator of a healthy future, but it’s still a good idea to track your history and tackle poor performers that are suffering extended periods of poor returns and performance. An important aspect of reviewing and revising your portfolio is to ensure you rebalance your assets. Failure to do so exposes you to risk that is completely unnecessary, and it can get unhealthy when your high performers start to become a bigger and more important part of your investment mix. In simple terms, you become too reliant on one or two healthy products, and it leaves you open to more exposure risk. That said, it’s also possible to float the other way, too. You might focus on investing in less risky products, and your portfolio ends up jeopardizing your long-term returns. In cases like this, it’s important to sell some of your better-performing assets and invest in those that have done badly.
We hope this guide has helped you understand some of the concepts behind managing investment risk – good luck!