Understanding Risk Management In Investments

There is a lot of emphasis on risk management in the financial market. To be with it is first important to understand what risk management actually is.

Risk management refers to identifying, analyzing and accepting or mitigating the uncertainty in the investment decisions that one makes. A fund manager or an investor would manage risk. This lets him quantify what the loss potential could be if he invests in a particular investment. He then takes an appropriate action based on what his risk tolerance level is and also based on what investment objectives he wants to reach.

Risk management

There are a number of financial risks that are involved when one makes any investment decision. The financial instrument that one chooses to invest into will determine the amount of risk that is associated with it. Thus a bank savings account carries very less risk as compared to investing in the stock market.

There could be other risks too like volatility in the market, recession or high inflation.

It is important that these risks are either controlled or minimized and for that risk management is practiced. It is very crucial that proper risk management is followed else the investments could lead to washing away your capital in a single go. Bear in mind that every asset class would have a different risk associated with it and thus any asset class that you invest in has to be analyzed separately.

How does one manage the investment risk?

There are some ways in which the portfolio risk could be managed.

  • Follow the trend of the market

If you are investing in the stock market or any other asset class then it is important that the investment follows the trend. This will increase the chances of being profitable. This also helps in minimizing risk.

  • Rebalance

It is important as a longterm trader that you manage your portfolio periodically. This is especially important if you are having an asset class that is taking a big percentage of your entire portfolio.

  • Size your positions

To manage your risk all that you need to do is to manage the size of your exposure. This means that in case you are trading in stocks and have a predetermined risk, then back-calculate using the stock price and the stop loss amount to arrive at the number of stocks that you can take.