Investing in stock markets can be a lucrative way to grow your wealth, but it is also important to understand the associated risks. How well you manage and mitigate your risk is directly proportional to the returns you make. The higher the risk, the more returns you can register. However, only choosing high-risk investments will jeopardise your capital and sticking to low-risk options will limit your returns. Hence, creating a balance and choosing the right investment option is important.
Whether you are new to investing or a seasoned investor, risk management techniques can help you navigate through the ups and downs of the stock markets.
Here are some effective ways to manage stock market risks and maximise your portfolio returns.
1. Analyse your risk appetite
Risk appetite or tolerance refers to the amount of risk you can endure. It depends on many factors, such as age, current financial situation, financial responsibilities, etc.
For instance, if you are young with minimal family responsibilities, you can adopt aggressive investment strategies with higher risk. As you near retirement, it can be wise to adopt a more conservative approach to preserve your wealth.
2. Research well before investing
Before you step into the markets, remember that markets are affected by several intertwined factors. It is important to study and research the current market trends, domestic and international happenings, historical data (of both the benchmark indices and the stock), financial statements and ratios of the concerned company.
Relying solely on social media apps or following random investing advice blindly can pose a high risk to your investment.
3. Allocate your assets wisely
Concentrating your portfolio in just one asset class can be a risky strategy. A wise asset allocation strategy is to invest in multiple asset classes to reduce risks and optimise returns.
A commonly used strategy is to combine inversely correlated asset classes. For instance, you can invest in equity and gold. So, when equity markets are low, gold performs well and vice versa.
4. Diversify investments within asset classes
In addition to choosing the right mix of asset classes, it is equally vital to choose varied investment products within the asset class too. This diversification will decrease the total risk associated with the portfolio. For instance, if you are investing in stock markets, look to diversify into various sectors (Pharma, IT, FMCG and more) rather than concentrating it in one type of stock class.
5. Hold your investments for longer
To create wealth long term, it is important to stay invested long term. Holding your assets for the right investment horizon is as important as choosing the right entities.
Long-term investments will help you reap compounding gains and protect against the effects of small market corrections.
6. Maintain liquidity in your investment portfolio
Emergencies never come announced; hence, you must maintain a healthy level of liquidity. Some unforeseen situations may require you to withdraw your investment. In such cases, liquid assets can be helpful.
It is generally recommended to maintain an emergency fund 6X your current earnings or salary. As this fund needs to be readily accessible, you can keep it in a bank fixed deposit or a liquid fund that allows you to withdraw your money immediately.
7. Keep an eye on your portfolio
Monitor your portfolio periodically, irrespective of your investment duration. This will help you to rebalance the portfolio as per its performance. You can remove securities that are consistently underperforming and consider investing more in ones that seem promising.
Stock market risks are an unavoidable aspect of trading. Adequate research and regular monitoring are effective in mitigating these risks. It is important to analyse your risk appetite and financial goals before investing in any stock. The strategies above will help you manage risks effectively and grow your wealth. Consult a financial advisor for more guidance and tailor-made strategies.