When a lot of people hear the word “risk”, they immediately attach a negative attribute to it and want to shy away from it; I mean it seems only logical. If risk is defined as the deviation from an expected outcome or the probability of an unwanted event occurring, why should anyone want that? Well, in the investment world and in life generally, there is always a risk in every activity and it is a necessary ingredient for any reward. The act of effectively gauging these risks and taking an informed decision is called risk management.
We’ll use common day examples to buttress this. With something as simple as going out of your house to work, there’s a risk that your car could get dented by another driver. Based on statistics, the risk is increased for those in Nigeria, who commute in Lagos State as opposed to most other states, the risk is higher if there’s a terrible traffic jam and a lot of public transport vehicles are in a hurry, the risk is yet even higher if you aren’t the most careful of drivers and you’re also in a hurry.
Another example? If you lend money to friends and family, there’s always a risk that you won’t get it back at the agreed time. The risk is higher if he doesn’t have a steady source of income. The risk increases if the borrower has other unsettled debts. The risk is yet even higher if you don’t have anyone financially trustworthy who can guarantee that he would deliver on his end.
So, you see, just as in the real world, the investment world is riddled with risks and every investor has to learn to effectively calculate these risks and make informed decisions.
So, we’ll be giving you some easy tips to help you do that.
- MAP OUT YOUR FINANCIAL PLAN: Knowing your financial goals, objectives and time frame will help you know what to delve into and what not to. How much do you intend to make from your investments? How long do you want to take to reach that goal?
- EVALUATE YOUR COMFORT ZONE: All investments involve some measure of risk. You should understand that there is no such thing as a guaranteed investment. Even the most well calculated investment could be subject to an “Act of God”. How much are you comfortable with risking? And you might have to ask yourself the hard but important question; Can you afford to lose it?
- CONSIDER DIVERSIFYING YOUR INVESTMENTS: This is basically the principle of not putting all your eggs in one basket. Spread them out in well researched investment schemes and if one fails, you will be able to recoup from the profits of the others.
- HAVE AN EMERGENCY FUND: Try to keep some money aside incase something goes wrong. Most people will have savings worth about 6 months of income in case something sudden comes up.
- INCREASE INVESTMENTS IN STANDARD RATIOS: While there will be the urge to jump in with certain huge amounts when you have them or feel like the market is favourable, deciding to increase your investments by specific amounts in fixed intervals will help protect you from the risk of investing all your money at the wrong time. By making regular investments with the same amount of money each time, you’ll buy more of an investment when the price is low and less of it when the price is high.
- BALANCE YOUR PORTFOLIO REGULARLY: There’s always the temptation to leave a huge amount on an investment plan that seems to be doing well, especially when the plan generated that amount. However, that isn’t always the best decision. Balancing your portfolio might involve withdrawal of profits or sometimes taking from the “booming” investment and putting on another one that isn’t as rewarding but has less risk.
- AVOID SCHEMES THAT PUT YOU AT THE RISK OF FRAUD: While we’re not saying there aren’t fascinating investment schemes, a lot of times, if something seems too good to be true it most likely is. So, when you see that class of investment ,make sure you conduct your due diligence; be sure to investigate and find multiple confirmations and even at that, don’t rush head on with all your cash. Follow the above tips.