Know Your Risk And Manage It While Investing

While investing people tend to look at loads of factors, which is beyond their control. They look at parameters such as oil prices, stock prices, and interest rates when it comes to making equity investment. Investors usually spend hours tracking these uncontrollable factors but hardly spent time on factors, which is in their control. The uncontrollable factors include index level, oil prices, interest rates, inflation, laws and other political and natural risks. The factors, which are in an investors’ control include his needs, goals, time horizon, objective and risk taking ability.

In fact when it comes to investing, to be a winner, one must make as fewer costly mistakes as possible. Understanding and managing risks are the most important parts of the investing process. Take too much risk and you might jeopardize your financial future with huge losses. Take too little and you jeopardize your financial future with low returns barely enough to cover your lifestyle expenses.

First determine what returns you reasonably need to achieve your financial goals (Assuming that you know what your goals are). So if you need a 10 % return, why should you opt for some exotic thing like a derivative. Second step is to figure out whether you are getting those returns consistently. The best way to measure your financial success is not by whether you are beating the market but by whether you have put together a financial plan and a behavioral discipline that are likely to get you where you want to go. In the end what matters isn’t crossing the finishing line before anybody else but just making sure you do cross it.

There is no one who doesn’t make mistake but the key is to learn from the mistake and avoiding it in future. Just because a mistake has given some losses doesn’t mean one should avoid that asset class but rather go back and invest wisely so that one can get what was expected from that asset class. There needs to be a lot of discipline. Greed often plays a spoilsport while investing. The lure of quick money overnight often proves to be more harmful than beneficial. If you invest Rs. 100 and after a year you need the money then one should not put the money in equity. Also if your requirement is only Rs. 107 after a year then why should one get greedy and invest in equity and have sleepless nights. The Rs. 100 invested in equity can give him either Rs. 120 or Rs. 80 both of which is not required by the investor. So the best thing is to put that money in a FMP or FD and get an assured return at the end of the tenure. On the other hand if the investor needs say Rs. 145 after 3 years then he should realize that he needs to take adequate amount of risk. In this case the risk is justified as the time horizon is larger and the amount required is also larger. So an equity asset allocation makes sense here. Being conservative here would be foolish here as the investor would not be able to achieve his target only. In such a scenario the whole exercise of the financial planning is a waste. Over a longer term horizon equities tend to generate higher positive returns.

But just in case the investor achieves his target beforehand then he should not stay in that asset class any more in hope of higher returns but gradually move out to a safer asset class. Asset allocation is the key in any kind of financial planning exercise. One should remember that it’s their own hard earned money and it should not be played around with recklessness.

So rather than looking at the index level, oil prices, interest rates while investing the investor should look at what he requires and at what time period and do an asset allocation accordingly and invest and have peaceful sleep and don’t feel worried by his investments.