Understanding Risk in Investment: How to Manage Your Portfolio Safely

Investment could be considered and regarded as a process or a journey that will eventually bring fruits of reward. Nevertheless, investment has an inseparable component in it that is super crucial, and which should always be taken seriously. That component is risk. Prior to investing, people usually take a lot of measures to ensure that what they are doing will bring as much return on their investment as possible.

But what is the risk in investment? What to expect and how to manage it? And finally, how to reduce the risk that comes with investment? We will cover these questions and many more related to risk in investment and strategies on how to navigate it in the paragraphs below.

What is the risk in investment?

Risk, as the word suggests, is a potential hazard. In this particular case, it means that full or partial financial loss could also be a consequence when investing. There are different types of risks that can impact your investment, including:

1. Market Risk

The primary type of risk is the market risk. This is the risk which you might face as a result of the overall state of the market. The financial market is influenced by different external factors, such as geopolitics, inflation or currency. Recently for example, as a result of these factors, it was announced that India’s price-to-earnings (P/E) multiple is at 22.2.

2. Interest Rate Risk

This next risk is on the interest rate which fluctuates, for instance, based on bonds. Once the interest rate is high, the bonds are low and vice-versa. Hence, they influence each other in the price, so if you are taking a bank credit, you should definitely be aware of it. This happens particularly because new bonds with higher value become more attractive to people than older ones with a lower value.

3. Inflation Risk

Inflation is a term that has entered the everyday vocabulary because of its significant appearance on the market ever since the pandemic situation. We have all witnessed the rise in the prices of goods in recent years, and that’s inflation, which in investment could mean that the value of something you bought two years ago is not the same today.

Risk Management Strategies

We discussed above the most common types of risks, but the question that many might ask is on how to mitigate those risks. There are different kinds of strategies for risk management that you can consider when investing. To name and discuss a few:

1. Stop-Loss Orders

This technique is used to reduce the risk of losing all financial investment return when you observe that one of the stocks is not stable at its price or is dropping significantly. In such cases, it is advisable that you sell such a stock when it reaches a predetermined price in order not to lose even more of your investment.

2. Asset Allocation

Asset allocation is a strategy in which you reassess your investments and, based on the current situation of the market, allocate them elsewhere. This is especially present in the crypto market for example, when investors see that the value of a coin is about to drop based on the analysis and then invest in another coin.

3. Emergency Fund

Every investor is highly advised to have an emergency fund set aside. Emergency funds are also advisable in everyday life, but particularly in business. Since there are different kinds of risks that can occur, having an emergency fund will allow you to feel less stressed about the potential losses.

Which investments are safer from risk?

People tend to look for safer options when investing in order to avoid the loss of investments or any potential risk related to it. In such instances, the attention is particularly drawn to cash equivalents like savings or short-term deposits. Similarly to that, government bonds are highly favored by all big investors, such as the richest NBA players who are involved in financial market and made their capital outside the NBA itself.

It is also preferred to invest in the so-called blue-chip stocks or the high-quality corporate bonds. Blue chip stocks are the stocks of big companies and high-quality corporate bonds are bonds offered by big companies, which anyone and everyone can buy and possess. Likewise, index funds and ETFs are investments which financial advisors mention in regard to being safer from risk.

Nevertheless, it should be noted that even though these investments might be safer from risk, there is still some low level of risk present at every investment. That being said, no investment is risk-free but can be manageable if analyzed properly and an efficient strategy is used to mitigate it. If this is your first time investing, it is helpful if you consult a financial advisor in regard to the risk potential for any investment you make.