5 Ways to Manage Risk
38m
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Tape Talk | Investing, Business, Wealth, and Your Money
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On this week's episode of Tape Talk we're talking about risk, specifically how to manage it! We'll explore five different approaches you can use in your investment life to help manage your risk.
1. Use StopsOne of the key ways to provide some risk protection when investing is to have a plan which includes predetermined levels at which you would exit and reassess your investments. This technique is referred to as a "stop" level. Whether you utilize an order placed in the market or a mental line at which you'll personally execute the order this technique allows you to go into an investment with an estimate of your initial risk should your thesis not pan out.
2. Take ProfitsExiting a position isn't reserved only for investments moving lower. If you are trading with a plan there may come a time when an investment has appreciated significantly and the wisest thing to do may be taking a portion of those profits to diversify elsewhere. Utilizing this strategy helps to ensure no one position becomes significantly overweighted at the top of its trend while also freeing up capital to be used for new opportunities.
3. Don't Fear CashAfter taking profits, you'll be left with some cash in your account, this is nothing to fear. Cash is a resource to be deployed into an opportunity, not a burden to be relieved as quickly as possible. An important element of risk management is to avoid fear and anxiety over holding cash. When the correct opportunity comes along, this stockpile will allow you to move on something that others may miss.
4. Understand Your "Live" RiskYour live risk is an important element of your investment portfolio. This level is best defined as the total risk from all of your investments. So, simply take the difference between the market price and the stop level of each position you hold and add this number for all your positions together, the total is your live risk. If every one of your positions were to revert to your stop levels, and you could exit at that price, this is the amount of your potential loss. Know this number, accept it, and ensure it doesn't keep you up at night.
5. Be Aware of Your EmotionsEmotions are a part of life. However, when unchecked these emotions can begin to overrule the plan you put in place. When volatility strikes or boredom sets in different emotions may begin to creep into your investment strategy. It's important to identify these, assess if anything in your plan has really changed, and make changes only if they're truly prudent. By carefully separating emotions from actual changing criteria in your plan you may save yourself a few investing missteps.
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