One of the obstacles many people face when they start learning about investing is how to manage risk. Risk is a word with often negative connotations. It makes you think of the Bermuda Triangle, or quicksand - which, let’s face it, we all thought we’d face more as an adult.
But without risk, reward is less forthcoming. We each judge risk every day whether that’s crossing the street, leaping into elevators just as the doors are closing, draining pasta water, checking to see if we’re walking into quicksand, or simply walking upstairs holding a hot cup of tea.
We’re used to these risks though, these are instinctive. The harder ones to handle are the things that are a little more out of our control. And as we know, markets can sometimes be a bit out of control. We’re not dicing with a small tea spillage here, we’re talking about money, hard-earned money, which often makes us more cautious.
However, it doesn’t need to be so nerve-jangling. It just takes a little research and organisation to get on top of the risks as well as understanding your appetite for it
Whether you are a bold risk-taker, or always go for the safest possible option, there are a few key things to consider when looking at a stock name to invest in.
Firstly, consider the company-specific risks - have there been any accounting scandals, lawsuits, or mismanagement? Is there anything unique to the company that could be risky, that isn’t an industry-wide phenomenon?
Then broaden the search to industry-specific risks. This could include a downturn in demand for these types of products, changes in consumer tastes, technological changes, or changes in the law. This risk can be controlled by not concentrating your portfolio in a single industry.
Related to this is considering your investment style. The market is cyclical and will reward and punish each investment style over time, so working to vary investment styles, and not concentrating too much on one specific style is a way to mitigate this risk.
The final risk to consider is market risk. This is when there is a general downturn in investors’ appetite for stocks which causes an overall reduction in the valuation level of equities. Managing this risk through diversifying into non-correlated markets, hedging or sell discipline will help you negotiate this risk.
Here at Upside, we try to take some of this burden from you. When you're building a portfolio on the Upside app we help you find the right risk level to suit you. We are here to help you make informed choices at every step.
There is a Chinese proverb that says: Pearls don’t lie on the seashore. If you want one, you must dive for it. Here at Upside, we have a saying too, and it’s one we stand by: Upside, the science of being right.