Risk is part of life, and the same holds true for investment. Managing risk is crucial – many people make efforts to manage the potential risk, while others leave it to luck.
An everyday example is related to life insurance. Everyone knows life is uncertain, and anything can happen along the way. To lower the financial risk, only some people take term insurance, while others leave it to their luck.
When it comes to creating wealth – the same rule holds. In investing, some investors only focus on the returns – they want to grow their money fast. Some investors protect themselves against the inevitability of a bear market or a correction by using various risk management strategies.
When we talk about creating risk management strategies, it does not mean you stop investing and start keeping your money in fixed deposits. The investment risk management goal is to ensure your losses are minimum – they don’t exceed your acceptable boundaries. It is essential to mention that the investment boundaries are different for different investors. The boundary limit can be determined by factors like risk capacity, need, and emotions.
Strategies to Manage Investment Risk
If you can preserve your capital during difficult times, you will have larger capital to grow when the good times return. With this thought, let us look at different strategies to manage investment risk:
Portfolio Diversification: We have emphasized, time and again, that ‘you should not put all your eggs in one basket’. You must allocate your money across different asset classes. It will help you avoid disaster if one comes. Talking specifically of the equity market, we have seen many portfolios where investors’ money is all into small and mid-caps. If you have an existing portfolio, you should check the allocation – are you diversified? Jarvis Invest helps you create a diversified equity portfolio on the first day and ensures it remains the same as your investment grows.
Reducing portfolio volatility: You can reduce your portfolio volatility by keeping a small percent in cash and cash equivalents. It will help you avoid losses – if need be for cash, you do not have to sell your investments in losses.
How much to keep in cash or invest in liquid funds? The answer to this question will depend on your goals and timelines. You have to ensure you do not have too much cash in your savings account – the inflation is high and will eat up money in the bank quickly.
Make investing a habit: Another strategy to reduce your risk is to invest consistently in the stock market. Investing is about discipline, patience, and gains in the long term. If you think you can put all your money today in good stocks and you will become rich, it will not happen. Also, it carries a specific risk with it. You need to make investing a habit and invest whatever amount you can in different financial instruments. Sometimes, you will buy when the market is high and sometimes when the market is low. In the long run, the cost will average out. You avoid buying at the peak – you minimize your portfolio risk.
Know your risk profile: Risk is a relative term. You may know that at a high level – there are three investor types – conservative, moderate, and aggressive. The meaning is self-explanatory. However, what it means to you as an individual will defer. The conservative may be different for someone in their 20s compared to someone in their 50s. Hence, it is better to understand your risk profile in detail. Once you know, invest accordingly. Jarvis Invest breaks down the type further and helps investors make investments per their risk profile.
Create a maximum loss plan: It is a method you can use to manage your asset allocation cautiously. A maximum loss plan is created to help you from making bad decisions based on your anxiety about market movement. It gives you little control over the maximum drawdown – a measurement of decline from an asset’s peak value to its lowest point over time. The plan is specific to you and indirectly related to the previous point – risk profile.
What if you can’t do all these?
As mentioned at the start, risk management is crucial, and you cannot be a successful investor without implementing these strategies in your investment journey. We at Jarvis Invest have created a system that comes with an inbuilt risk management system. You don’t have to worry about managing the risk and implementing different strategies. The AI-driven platform will take care of everything.
Whatever stocks it recommends investing in, it tracks those stocks 24*7. If there are any red alerts, you are notified immediately and can exit your investment.
Can we humans do the same? We mostly get such alerts or information when the stock has fallen significantly. Imagine a situation where you exit investments that are likely to fall significantly. How much damage control can happen over years?
Have a risk management strategy
Risk management is essential to keeping hard-earned savings safer and losses to a minimum. Whether you select Jarvis for it or do it on your own, do not delay having one. Here is an important point related to learning you must always remember – As losses get larger, the return that is necessary to get back to where you started increases significantly. It takes 100% gain to recover from a 50% loss – it does not happen readily.
Leave a Reply