Whether it be a career change, moving overseas or investing, nearly every element in life carries inherent risk. With that, success in investing isn’t about just knowing the markets: it’s also about mastering the art of risk management. Just like the ASX, where share prices rise and fall, your investments can soar and dip throughout the year.
In this guide, we’ll take you through tips for managing risk when navigating the Australian stock market.
What is Risk Management?
At its core, risk management is about the evaluation of risk in certain transactions, in an attempt to control potential losses associated with investment portfolios and then developing strategies to manage them. The stock market is a volatile environment where risks can arise from various factors such as market trends, company performance, geopolitical events and economic conditions such as inflation. With the right risk management techniques in place, investors can make informed decisions even when the market throws them a curveball.
How can I manage risk?
One way to mitigate risk is diversifying your portfolio across sectors. This means spreading your capital over various industries such as IT, energy, materials and real estate in both large and small companies. This can be extended by diversifying into other asset classes such as commodities and forex. Diversification lowers your portfolio’s risk because different asset classes perform better at different times.
How do I diversify my portfolio to manage risk?
Here’s a methodical approach to sector diversification:
- Identify sectors: Begin by scouring major sectors on ASX such as healthcare, energy, materials, industrials, and more.
- Allocate capital: Determine the percentage of your trading capital you’re wiling to allocate to each sector. This allocation should reflect your risk tolerance and outlook for each sector’s performance. Identify your risk appetite and only invest what you are willing to lose.
- Monitor and adjust: Keep a watchful eye on the performance of each sector in your portfolio. Keep tabs on stock prices, dividends and other key indicators. If a sector significantly outperforms or underperforms, consider adjusting your strategy for future investments.
Here’s 5 key takeaways:
- Perform your own research
- Understand your risk tolerance
- Diversify your instruments
- Employ a long-term strategy
- Monitor your portfolio
