[This article was written by Christine Bourne.]
It’s a risky world out there, and we are all becoming more risk averse as the stakes get higher. But for the canny investor there is twice the amount of opportunities to profit as others overstretch themselves, panic, sell the wrong investments, and buy the wrong investments. Here’s a summary of five ways to mitigate investment risk and stay on the money.
#1 Keep a clear head
It’s important to stay clear. For example, note that this article is about mitigating risk, not avoiding it. Investment is a risky business, because it is risky to invest in business. Research has shown that, as a result of the way the human brain works, in investment markets certain behaviours can take and lead us to make decisions of dubious wisdom. This is even more likely in a jittery market because of the overriding influence of fear as a human emotion, and the desire to take shelter with the pack. Become self-aware about these risks. And, it goes without saying, avoid the risky behaviours of mixing drink and drugs with work.
#2 Don’t be sentimental
When traders are in the ascendancy lots of nonsense is talked about their seventh sense, or their Midas touch. Trade their gilded hype for a pinch of salt. Analyze everything carefully. Reality check your ‘facts’ and never make decisions on gut instinct, otherwise known as sentimentality, alone. For example, if you are choosing risk assessment software then give proper weight to the serious reputation of a company like APT but no more than that.
Related to the above, take only calculated risks. As your granddad might have taught you, gamble only what you can afford to lose. To make him prouder still, calculate your risks and invest only in those investments you calculate, for some good reason, to be worth the gamble.
Always take a clear, fact-driven, and balanced approach to your investment portfolio. While it’s true you can’t make an omelet without breaking eggs, it’s also true that you don’t want egg on your chin. Consider the fact that where intensive farming was once seen as the solution to increased production and battery chickens were thought to lay golden profits, these days’ people will pay a premium for a speckled egg from an organic, free-range chook whose name they know. If you are going to invest in eggs, then also consider diversifying into spoons.
Offsetting is an art that involves a refinement of all of the above techniques for mitigating risk. In increasingly complex markets, most serious investors rely on sophisticated software programs to assist them with the offsetting portfolio risk in financial management, after all no matter what we like to think, computers are better than us at mitigating risk.
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