Portfolio risk management is important for preserving initial capital and earning return with some certainty. However, it comes with mind-numbing complexity, and each decision can involve risk amid a never-ending stream of calculations.
Because in the world of investment, it’s bound that a decision or two leave a dent in your portfolio. Add to that the problems pertaining to faulty information or insider trading and you have several risks to worry about.
So, how do you protect yourself against risk and lessen the adverse impact on your portfolio? There are many different guidelines for risk management, but there are a few strategies that can keep your portfolio on a healthy, profitable course, without forcing you to purchase derivatives or quick decision making. Here’s what you can do:
Integrate a safe haven component
What is commonly happening in the global market is that the more risky assets such as stocks and commodities could rally one day. Therefore the sentiment can change all of a sudden, so as an investor, it is usual to take advantage of any opportunities given the fluctuations. More specially, it is recommended that you keep safe heaven assets in your portfolio.
At the same time, you need to understand ETFs and mutual funds you are purchasing. This is where you could benefit from a complex body of investment knowledge, which is attainable through certification programs and courses. IMCA points out that long-term investment planning is too challenging and complex for do-it-yourself traders, so individual investors would benefit from a resource that contributes to prudent investment decisions by providing guidance and objective advice. Such knowledge would help you integrate the right asset component depending on the nature of your portfolio.
Diversification includes holding different asset classes including commodities, property, bonds and equities for going through troubled times during asset-specific downturns. For instance, if you are holding an equal weight in all of these asset classes, and bonds go haywire, the rest three will make sure your portfolio is able to hold the fort.
Diversification can also be used to spread risks in different sectors. This year, Goldman predicts steep losses for gold; however, having your portfolio spread to more than one sector would prevent you from feeling the effects if gold was one of your investment. Lastly, you could diversity on the stock specific level. Holding stocks of more than a single company in a sector reduces risk specific to stocks.
Rebalance your investment portfolio
You’ll need to rebalance your portfolio every 12 months. It means bringing back your portfolio to its initial asset allocation. This is important because investments may go out of sync with your initial asset allocation over time; this usually happens when one of your portfolio assets, typically equities, grow at a faster pace than the others.
For example, if equities represent 25% of your portfolio at the start of the year, but have grown in value to 35% after 12 months, you’ll need to sell some of your holding and buy an underweight asset to rebalance to your original allocation.
Managing risk is vital, because it can keep your portfolio safe from a drawdown. These tips would help in managing your exposure to risk and keep unexpected losses to a minimum.