Investing can be a roller-coaster ride which may lead to impressive gains or painful losses. It is impossible to eliminate risk, but the key is to understand and manage it effectively.
What is Risk Management?
It is the process of identifying potential risks, analyzing their likelihood and impact, and developing strategies to help mitigate them. In simple terms, it’s about minimizing the negative effects of uncertainty. This is a critical element because it helps investors preserve capital and potentially achieve their goals.
Types
There are several types of risk management, and each requires a unique approach to help manage them. Some of the most common types are:
- Systematic – inherent to the entire market and cannot be diversified away. Examples include interest rates, inflation, and market risk.
- Unsystematic – specific to an individual stock or company and may be diversified away. Examples include company-specific risks, such as management, financial, and legal.
- Event – chance of a particular event adversely affecting an investment including a natural disaster, political crisis, or technological breakthrough.
- Liquidity – associated with not being able to sell an asset quickly and easily without a significant loss.
Management Strategies
Once you’ve identified the types of uncertainties you face, it’s important to learn how you can manage them effectively. Here are a few tips to help you get started:
Asset Allocation
Determining how to allocate your assets amongst different types of investments can help offset potential exposure. This means spreading it across different sectors, geographical locations, and types of assets.
Diversification
Diversifying your portfolio can help minimize the potential unpredictability associated with individual investments by purchasing a variety of assets like stocks, bonds, mutual funds, or real estate.
Analyze Opportunities
Carefully considering potential options, and performing a comprehensive analysis, can help identify and help manage possible downfalls. Additionally, thoroughly researching its potential risk can help you anticipate relevant market events that could impact the financial prospects of the investment.
Setting Stop-Loss Orders
A stop-loss order is an order placed with a broker to sell a stock once it drops to a certain price level, which is designed to limit an investor’s loss on a security position.
Talk to a financial advisor
It is essential to consult with a financial advisor to get the best advice and guidance on risk management strategies. An experienced advisor can help you develop a personalized investment plan taking into account your financial situation, goals, and tolerance for uncertainty.
Remember one of the keys to effective risk management is to be informed, be prepared, and be ready to adapt. By working with a financial advisor, you may be able to increase your chances of making sound decisions and avoid common pitfalls.
At Independent Financial Services we have professionals who can guide investment strategies, offer tax-efficient savings options, and assist in retirement and business succession planning.
Schedule a call with us today to learn more about how we can help!
Material provided by Redfern Media, an independent third party. Raymond James is not affiliated with and does not endorse the opinions or services of Redfern Media.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but there is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification.
Stop prices are not guaranteed execution prices. A “stop order” becomes a “market order” when the “stop price” is reached and firms are required to execute a market order fully and promptly at the current market price. Therefore, the price at which a stop order ultimately is executed may be very different from the investor’s “stop price.” Accordingly, while a customer may receive a prompt execution of a stop order that becomes a market order, during volatile market conditions, the execution may be at a significantly different price from the stop price if the market is moving rapidly.