Most investors consider that earning high returns is the only way to be successful in investments. So many books, articles and podcast focus on “how to double or triple your money”.
But is that the best goal to have? Or could there be a different approach to attaining financial success?
The best and most successful investors focus on RISK and not just returns.
Good returns often follow if the investor manages his risk effectively. Risk is not a dangerous thing; if you take prudent risks, there is a good chance that you will make good money from your investments.
So, let’s talk about risk in investing and how to manage it.
When people say that an investment is risky, what does it mean?
In investments, the risk is measured by volatility or standard deviation, i.e., how much the asset’s price moves away from its average price.
It is just a measure of variation in the price of the asset.
Cryptocurrencies and equities are some of the riskiest assets available in the market. This is because the markets are volatile, and many factors affect its price directly. But their returns are also significantly higher than other low-risk assets.
Hence, it is quite clear that returns are directly proportional to risk. Meaning, higher the risk higher the returns and lower risk, reduces the returns.
So, if you are looking for significant returns, there is no way you can avoid risk. However, you can benefit from taking the risk if it is managed well.
What is Risk Management?
Risk management is nothing but the process of identifying, analysing and accepting or mitigating certain uncertainties in the investment decisions.
In other words, risk management requires you or your fund manager to analyse and try to quantify the potential for losses in your investment.
You may then act upon it based on whether it aligns with your goals and risk appetite. Let me share some popular risk management strategies that will help you avoid vast drawdowns of your corpus.
1. Define Your Goals To Identify risk
If you are not sure of where you are headed, how is it possible to assess the risks in your journey?
So, clearly defining your goals is a vital part of risk management.
Analyse your investment profile and make a definitive set of goals. This will allow you to assess and mitigate the risks that you may be taking while investing.
2. Create a Tactical Asset Allocation Plan
Studies show that portfolio asset allocation is responsible for 90% of investment returns. Choosing your asset allocation plan is vital to keep risk at bay, and it requires your attention with a keen eye.
Asset Allocation simply means:
The way your assets are divided across different asset classes or asset groups. Using tactical asset allocation, you can have a dynamic strategy that adjusts to the economic conditions.
Instead of just holding on to strict percentages, you can have the flexibility to choose from a range of assets depending on its valuation.
3. Set Your Margin of Safety
You need to set a margin of safety for each asset in your portfolio.
The Margin of safety is the difference between intrinsic value or the fundamental value of an asset and the price at which it was purchased.
Setting a margin of safety gives more room for mistakes and other unforeseen adversities. A higher margin of safety leaves you with lesser risk, and thus, higher capital gains may follow.
4. Enhance Your Decision Making
Decision making is the most crucial step in the risk management process. It is impossible to avoid every possible risk out there. And so, calculated decision making enables you to curb unwanted risk.
Why Is Risk Management Important?
Risk is always a part of investments; without taking the risk, it is nearly impossible to earn high returns. Also, it is quite difficult to foresee the future and plan things during difficult times and dynamic situations.
For instance, the Covid – 19 Pandemic caught us all off guard and jolted the global economy. This caused certain uncertainty in both personal and financial lives.
Having a risk management plan takes into account all possible adversities and losses that may occur in the future. And planning the required course of action will make it much easier to adapt to any changing scenarios without taking a big hit.
If the risk is impossible to avoid, isn’t it wiser to manage it effectively rather than running away from it?
If you agree with me, weigh your risks and make a solid risk management plan for yourself today because we never know what tomorrow will bring.
[su_note] KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing. [/su_note]
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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