The motive for achieving financial goals is to determine the investment means by which the goals can be achieved with minimal risk.
The motive for achieving financial goals is to determine the investment means by which the goals can be achieved with minimal risk. But creating wealth or achieving financial goals with limited resources requires taking risks and investing in instruments with capital risks.
However, there are ways to reduce risk through diversification, investing through market cycles, etc.
“Any investment, big or small, is subject to market risk. So the rule of thumb to remember is to protect your principal. Although risks cannot be entirely predicted or avoided, it is possible to protect the portfolio by being aware, cautious and attentive to market changes in order to reduce investment risks. Diversification helps, in more ways than one. Investing in more than one asset class will ensure unsystematic risk reduction (investing in one particular company) because if/when you experience a loss, the loss is limited,” said Anil Pinapala, CEO and Founder of Vivifi India Finance.
“What you add to your portfolio matters. If you add a number of uncorrelated assets, this will ensure a balanced return because you will always have an asset to lean on when one of your chosen investment assets goes down, due to the evolution of the market. This reduces the volatility of your portfolio. However, be aware of over-diversification,” he added.
Despite the need to add risky investment instruments to the portfolio to achieve financial goals, an individual’s risk appetite and risk-taking capacity also impact the choice of instruments.
“How you invest and what you choose to invest in depends on the risks you are willing or able to take. Two individuals will not have the same appetite for risk. It is therefore important to identify yours, taking into account factors such as age, income, responsibilities (dependents) and your financial goals,” Pinapala said.
“It is advisable to maintain adequate liquidity and seek financial advice before investing, keeping these points in mind. But once you invest, your job is not done, it has just begun, because to reduce the risks on your portfolio, it is crucial to understand the market, to be attentive to the changes which may or may not affect your portfolio, to evaluate your investments and to rework your asset allocation, if necessary”, a he added.
Explaining the relationship between risk and returns, Alok Kumar, Founder and CEO of StockDaddy, said, “There can only be four different scenarios when you invest money in any of the stocks or any financial asset. – Big Loss, Small Loss, Big Profit, Small Profit. What do you think can have a huge impact on your returns? Yes, that’s a big loss (say 10-15% in a single trade or 15-30% in a single investment). So we have to make sure we don’t fall prey to these poor risk management practices. Instead, risks should be set before taking trades and they should be set rigidly to a fixed percentage of your capital.
“Once you know how much money you can afford to lose on a particular stock, you need to define how much you can buy. Finally, don’t put all the eggs in one basket. You need to diversify the portfolio by sector and by market cap,” he added.
Explaining the importance of analyzing risk before choosing an investment avenue, Nitin Mathur, CEO of Tavaga Advisory Services, said, “Risk is one of the most underestimated topics in the world of financial markets. , however, whenever there is a decision to be made regarding an investment, the first thought in an investor’s mind should be around the risks involved in a trade.
Mathur suggests the following basic principles for risk reduction:
- Make sure the portfolio is sufficiently diversified. Diversification is all about spreading investments across different sectors and not sticking to one particular theme or idea. While over-diversification leads to lower returns with low risk, a concentrated portfolio is a high-risk, high-return concept recommended only to those who are experts in this area. The job of the investor is to find the happy medium (between over-diversification and concentration).
- Buy value and buy cheap. The best part about value investing is that it provides a maximum margin of safety because the downside risks are limited, unlike growth investing where the uncertainties are high and the downside risks huge. Would you consider buying a property at a high price when there are other cheap options? The same goes for stocks and mutual funds. Find themes that are available at cheap prices and suffer from temporary slowdowns, but should work well in the future.
- Maintain a disciplined approach to mutual fund SIPs, regardless of what is happening in the world. Systematic Investment Planning (SIP) helps to average NAVs at different levels over the long term. Always prefer SIPs to lump-sum investments, whether stocks or mutual funds.
- Avoid taking leverage and adding stocks using margins. Pure cash investing is a slow and steady process to winning the race. Although it takes time, the investor does not have to worry about repayments.