Mastering Personal Risk Management for Investment Success
Although there are many good options for investment, what really determines your success with whichever investment you choose is how well you manage risk which will make it Risk Management.
Your approach to handling risks with investments can either create significant earning opportunities or result in undesired losses. So your first step is to understand the elements of personal risk management.
‣ WHAT IS PERSONAL RISK MANAGEMENT?
The term “risk management” can sound daunting to an individual looking for a stable investment opportunity! It sounds like a concept for investment gurus, but really applies to anyone seeking a sound investment venture.
The thought processes that a fund manager puts into risk management are the same ideas you can use as well.
So in essence, personal risk management involves:
‣ Identifying the risks or uncertainty of potential investments
‣ Analyzing the impact on your personal financial position if the investment fails to produce the desired result
‣ Accepting the risks or mitigating against the impact, depending on your investment objectives. This could mean either going after the investment, or deciding to step away.
As a personal investor, one of your primary goals is to quantify the potential for losses. Based on how equipped you are to challenge those risks, you may choose to act or not act upon the investment opportunity.
A big part of your risk management position is determining your level of risk tolerance. Certainly, that is a financial determination. But how well you handle the impact of risk emotionally is also worth consideration.
‣ BENEFITS OF RISK MANAGEMENT
As a personal investor, you’ll find that personal risk management has a host of benefits:
‣ Supports strategic planning by giving you a “heads up” on potential risk
‣ Improves your investment know-how by educating you on potential scenarios
‣ Supports proper placement of investment dollars for maximum return
‣ Guards against surprises from the investment opportunity
‣ Improves your confidence and provides reassurance that you’re making the right decision.
‣ COMMON MISTAKES PERSONAL INVESTORS MAKE
Needless to say, skimping on risk management activities prior to making an investment can result in losses. Missteps are common when learning about investment and risk.
management. But such missteps can also result in serious consequences.
Try to avoid these mistakes:
1. Speculating about an investment. Especially as a newcomer to personal investment, it’s easy to become daunted by the element of risk! However, the last thing you should do is allow that fear to prevent you from making a sound investment.
– Ensure your risk-taking is aligned with your age and stage in life. If you’re a young investor, you stand a better chance of recovery if an investment doesn’t pan out.
– Focus on investing in companies that have higher risk, but show promise for growth in the long term.
– Go full speed ahead into taking risks that you can recover quickly from through income generation.
2. Over-committing to the investment. It’s great if you’re able to see past the risk of an investment and onwards to
3. the earning opportunity. But that doesn’t mean it’s a good idea to commit to it at all costs.
– By grossly overplaying your leverage, you stand the chance of experiencing a significant drop in your portfolio. That can be hard to recover from.
– Find your balance between modest and aggressive investments. Remember that the economy is struggling. Better safe than sorry!
4. Taking too long to act. Whether through training or professional guidance, you’ve likely been exposed to the highs and lows of investment. Most likely, one of the first lessons you learned is how quickly the markets move.
– Use your experience to tell you when you’ve landed on a good investment idea.
– Act on it before the rest of the market takes note.
– Avoid allowing fear or inexperience to cloud your judgment. You know a good thing when you see it!
5. Failing to consult multiple sources. Remember that you’re not alone in the personal investment world. Others have come before you and learned good lessons about investment and risk. Be sure to ask the pertinent questions so all the bases are covered.
– While you may want to take care of your own investment decisions, it’s a good idea to get some feedback from an expert. Consult with a financial advisor or fund manager periodically.
– Research online for blogs and other websites where other personal investors have posted. Reading their feedback can certainly help in your decision-making.
‣ YOUR PERSONAL RISK MANAGEMENT PLAN
So what’s next for you? How should you proceed with your personal risk management plan?
These guidelines can set you on a positive path towards sound decision-making:
1. Remember your age and stage in life. The key to successfully taking risks with investments is paralleling them with your age and financial status.
– Gain a full understanding of the type of risk you can afford and stick to that type of portfolio. It’s important to be able to recover if things don’t go as planned.
2. Choose investments you can monitor. Being able to keep a close watch on the investment can help you make timelier, informed decisions.
3. Commit to the outcome. Before you sign on the dotted line, ensure you are comfortable with the investment doing well or suffering. Be so sure of your commitment to the deal that neither outcome can significantly impact your peace of mind.
Maturity goes a long way when it comes to investment and risk management. Are you a mature investor? Do you accept that things could swing either way? This mindset can make the difference between a devastating outcome and a beneficial learning experience.