Risk in simple term means possibility of unexpected outcome ie "Something happens as A Surprise..!". Surprises are positive as well as negative.
Negative surprises are known as risk. However, positive surprises are opportunities
So we must always speak our risk and opportunities at same time when discussing risk.
We invest in risky assets for positive surprises, but we can not rule out occurrence of negative surprises.
So, how can individual investor deal with this situation?
To deal with risk we need to understand " what can possibly happen to our portfolio/investment? ".
Some of outcome of risk can be
a. Temporary decrease in value of portfolio.
b. Not able to sell (liquidate) portfolio when needed.
c. Delayed return on portfolio.
d. Total loss of capital.
e. Returns lower than expectation(inflation)
Once this is known, we can take relevant actions to deal with these outcome.
Actions are of two types:
1. Action taken before surprise has happened. These may be one of many of following
- Limiting amount to 5% in any of the stock
- Diversification of portfolio among debt/equity/gold/Real estate
- buying put option against our long position
- buying medical insurance to avoid untimely selling of portfolio in case of medical emergency
- invest in income generating asset (rental / high dividend yield stock)
2. Action taken when the surprise event has occurred. Such as
- Booking minor loss at SL to avoid higher losses on wrong decision
- Rebalancing portfolio allocation when there is major down/up movement in one of asset class
We need to understand and accept that: we can not know how much return will be made on equity/risky investment, also we do not know when this return will come.
Chart I have put here is of 4 very robust investible instruments. This shows how multiple robust assets behave over longer periods.
By rebalancing among such diversified instruments in portfolio can help generate returns while mitigating risk and taking advantage of opportunities.
Hope after reading this post you will have better insight on risk.
Negative surprises are known as risk. However, positive surprises are opportunities
So we must always speak our risk and opportunities at same time when discussing risk.
We invest in risky assets for positive surprises, but we can not rule out occurrence of negative surprises.
So, how can individual investor deal with this situation?
To deal with risk we need to understand " what can possibly happen to our portfolio/investment? ".
Some of outcome of risk can be
a. Temporary decrease in value of portfolio.
b. Not able to sell (liquidate) portfolio when needed.
c. Delayed return on portfolio.
d. Total loss of capital.
e. Returns lower than expectation(inflation)
Once this is known, we can take relevant actions to deal with these outcome.
Actions are of two types:
1. Action taken before surprise has happened. These may be one of many of following
- Limiting amount to 5% in any of the stock
- Diversification of portfolio among debt/equity/gold/Real estate
- buying put option against our long position
- buying medical insurance to avoid untimely selling of portfolio in case of medical emergency
- invest in income generating asset (rental / high dividend yield stock)
2. Action taken when the surprise event has occurred. Such as
- Booking minor loss at SL to avoid higher losses on wrong decision
- Rebalancing portfolio allocation when there is major down/up movement in one of asset class
We need to understand and accept that: we can not know how much return will be made on equity/risky investment, also we do not know when this return will come.
Chart I have put here is of 4 very robust investible instruments. This shows how multiple robust assets behave over longer periods.
By rebalancing among such diversified instruments in portfolio can help generate returns while mitigating risk and taking advantage of opportunities.
Hope after reading this post you will have better insight on risk.
