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Life can be full of risks, what’s important is how to manage them.
With investing, risk management is key to building your long-term strategy. While there are many different aspects to risk, today we’ll focus on three areas.
Knowledge, Concentration and Asset type.
Let’s dive into each one.
First up: Knowledge
As the great Warren Buffet, once said:
“Risk comes from not knowing what you are doing”.
This one is pretty simple – The more you know and understand your investments – The less you’re exposed to unknown risks.
This is why it’s important to gain a basic understanding of what you’re investing in and why you’re investing in it.
I wonder where I can find a reliable source of information to do just that…
Next up – Concentration
When you concentrate on only one trade, it can be much riskier than diversifying across multiple trades.
Imagine you risk your whole portfolio on just one investment. If the value of that investment goes down by half, you’d have lost 50% of your portfolio’s total worth!
However, if you’d only risked 5% on that one investment, losing half of it would only put your portfolio down by 2.5% – which is a lot more manageable.
In other words, consider spreading your risk by allocating capital to a variety of different assets.
As a rule of thumb, some investors choose to risk no more than 2 to 5% of their account per trade.
Let’s move on to our final aspect of risk, which is the asset type
Just like it’s extremely important not to invest in just one company – It’s also important not to invest in just one asset class.
It’s crucial to recognise which assets are riskier than others to create and manage a less volatile portfolio.
For example, exposure to crypto and commodities may carry more risk than exposure to ETFs, Smart Portfolios or fixed income assets.
Now here’s a tool that can help with managing risk – the stop loss.
Obviously not every trade you make will go up, so a stop loss is a tool used to limit the downside of investments that go against us.
It works by automatically closing your trade if its value falls below a certain point.
When you open a trade you can set your stop loss to decide how much you’re willing to lose.
This can be a great way to help you mitigate your risk.
That’s it for today! By growing your investment knowledge, creating your rules, sticking to them, diversifying and managing your risk – you can help navigate any potential headwinds in your investing journey.
Good luck! And see you in the next video.