Reducing risk is no rocket science
July 23rd 2007 10:21
It is essentially a gamble if you participate in the sharemarket or any risky investments without giving any consideration to risks. Even relatively safe monetary instruments like government bonds contain risks such as default and reinvestment risks albeit that they are relatively lower than that of the market that it makes such instruments seem almost riskless. Risk is everywhere.
One should never shy away from managing or reducing risk as it is not all rocket science as just some common sense will help you to make your investments a little more comfortable play. David Merkel of RealMoney.com, published in his blog 25 ways to reduce investment risk. They don't seem like some complicated financial engineering at all but just some relatively simple steps applicable for the retail investors.
Here are some of the simple strategies:
1. Diversify by industry, country, currency, inflation-sensitivity, yield, growth-sensitivity and market capitalization.
2. Diversify by asset class. Make sure you have liquid safe assets to complement risky assets. This is true whether you are young (tactical reasons) or old (strategic reasons).
3. Diversify by advisors; don’t get all of your ideas from one source (and that includes me). In a multitude of counselors, there is wisdom, which is something to commend RealMoney for — there is no “house view.”
4. Diversify into enough companies: better to have smaller positions in 15-20 companies, than 5 larger ones. When I began investing in single stocks 15 years ago, I started with 15 positions of $2,000 each. That made each $15 commission bite, but the added safety was worth it.
5. Avoid explicit leverage; don’t use margin.
6. Avoid shorting as well, unless you’ve got a profound edge; few are constitutionally capable of doing it well. Are you the exception?
7. Avoid implicit leverage. How much does the company in question rely on the kindness of the financing markets in order to continue its operations? Highly indebted companies tend to underperform.
8. Avoid balance sheet complexity; it can be a cover for accounting chicanery.
9. Analyze cash flow relative to earnings; be wary of companies that produce earnings, but not cash flow from operations, or free cash flow.
10. Avoid owning popular companies; they tend to underperform.
Read the rest here: Twenty-Five Ways to Reduce Your Investment Risk
Be it whether you are investing in any asset class, please give risk a thought just like how you would buy life insurance for yourself. It is better to be safe than sorry and after all investment is not gambling. You are purchasing the best possible financial freedom for the future. Well most are.
One should never shy away from managing or reducing risk as it is not all rocket science as just some common sense will help you to make your investments a little more comfortable play. David Merkel of RealMoney.com, published in his blog 25 ways to reduce investment risk. They don't seem like some complicated financial engineering at all but just some relatively simple steps applicable for the retail investors.
Here are some of the simple strategies:
1. Diversify by industry, country, currency, inflation-sensitivity, yield, growth-sensitivity and market capitalization.
2. Diversify by asset class. Make sure you have liquid safe assets to complement risky assets. This is true whether you are young (tactical reasons) or old (strategic reasons).
3. Diversify by advisors; don’t get all of your ideas from one source (and that includes me). In a multitude of counselors, there is wisdom, which is something to commend RealMoney for — there is no “house view.”
4. Diversify into enough companies: better to have smaller positions in 15-20 companies, than 5 larger ones. When I began investing in single stocks 15 years ago, I started with 15 positions of $2,000 each. That made each $15 commission bite, but the added safety was worth it.
5. Avoid explicit leverage; don’t use margin.
6. Avoid shorting as well, unless you’ve got a profound edge; few are constitutionally capable of doing it well. Are you the exception?
7. Avoid implicit leverage. How much does the company in question rely on the kindness of the financing markets in order to continue its operations? Highly indebted companies tend to underperform.
8. Avoid balance sheet complexity; it can be a cover for accounting chicanery.
9. Analyze cash flow relative to earnings; be wary of companies that produce earnings, but not cash flow from operations, or free cash flow.
10. Avoid owning popular companies; they tend to underperform.
Read the rest here: Twenty-Five Ways to Reduce Your Investment Risk
Be it whether you are investing in any asset class, please give risk a thought just like how you would buy life insurance for yourself. It is better to be safe than sorry and after all investment is not gambling. You are purchasing the best possible financial freedom for the future. Well most are.
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