Risk – The Good, The Bad and how can investors manage it better in the new year

Sponsored Post by XM.com

Investment risk is viewed as the probability of occurrence in losses relative to the expected return on any specific form of investment. While Benjamin Franklin once said that “In this world nothing can be said to be certain, except death and taxes”, investment risk might be the third certainty. There is no such thing as a “risk free” investment, we just need to learn to manage the risk – both the good and the bad.

An example of good risk management is passive investing as passively managed funds will avoid the risk of trying to predict which stocks will go up or down. In additional, maintaining a well-diversified portfolio can withstand volatility and do well on average over time.

One type of bad risk is market timing – going in and out of the market based on prediction. Precise prediction of market movement is almost impossible hence adopting this method will likely land your portfolio in negative grounds. Stock picking is another bad risk. While some investors can do well at this for a time, their luck will eventually run out. We can never beat the market consistently as no one is smarter than the market itself!

How should investors assess risk management for their portfolios in 2021

As we look ahead amid the COVID-19 pandemic, no one knows exactly what 2021 will bring but we should always be prepared and if 2020 taught us anything, it is that anything can happen with your investments. Below are a few tips on managing your risk:

  1. Be well educated: Read more financial news and content and be constantly informed. We are living in a world filled with information - Internet, magazines, books, etc. The ways to obtain information are endless and being better educated will surely benefit your investing career. In additional, we should also learn to figure out which are relevant information, and which are not, in order to be productive in your work.
  2. Be well prepared: Learn to react according to different market conditions.
    During a sudden bear market, know when you will need to sell off in order to minimize your losses. Sell to preserve capital for your next investment and do not let greed or fear get in the way of your judgement. Another example would be to identify the market trend to readjust your portfolio. Always review your ideal asset allocation periodically, meaning the right mix of stocks, bonds, and other asset classes.
  3. Have a better understanding of your personal risk appetite and purpose before investing. We all know that investing can be a powerful tool to increase one’s wealth but unfortunately, many of us blindly get into it only to fare badly because we do not set out our goals and risk appetite from the start. The first step of investing is always to understand the purpose of the investment. This is to determine your risk tolerance and what kind of products are suitable for your risk profile. Always know what you can afford to lose and work out your goals and timing accordingly.

What kind of results will be produced from better risk management?

There are many strategies that can be employed to mitigate the risk in a stock market, for example, portfolio diversification and the stop-loss strategies, just to name a few. Stocks are considered risky investment because their price movements can be volatile and unexpected. Adopting risk management will surely minimize the high risk in equity and safeguard your money to ensure gain. A careful and timely exercise of these options will help you to see the risks involved.

Click here to find out more information on how you can manage your risk better in the new year.

 

About XM.com

With over 3,500,000 clients since it was founded in 2009, XM has grown to a large and well established international investment firm and has become a true industry leader. XM is currently built of more than 450 professionals with long-year experience in the financial industry. Our extensive experience combined with support for well over 30 languages, makes XM the broker of choice for traders of all levels, anywhere. We have the expertise and the resources to help everybody realize their investment goals, like only a big broker can.

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