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3 Quick Points to Help Assess Your Risk Management When It Comes to Investing
Reduce risks for yourself
Investing is not risk-free. Future returns are not guaranteed. That is why it is important to consider risk management. What is risk management? In the investment world, risk management is the process of identifying, analyzing, and mitigating uncertainty. When it comes to assessing your risk management so that you can build the best portfolio possible for yourself, the following are three important points to consider:
1. Pinpoint the Potential Risk
2. Quantify the Risk
3. Select How You Will Reduce the Risk
1. Pinpoint the Potential Risk
Understanding and narrowing down on the potential risk in an investment opportunity is important. Some simple ways to observe a company’s potential risk are its earnings per share growth and its volatility.
When it comes to earnings per share growth, it is important to remember that a company’s goal is to make money. Whether a company is growth- or value-oriented, there should be some signs of earnings per share growth for the company over a quarterly or yearly period. If a company continues to see a decline in earning per share growth over a long period, such as five years, would you want to invest in that company? I do not think so. You are putting your money at risk no matter how “promising” that company may look.
When it comes to volatility, it is important to understand how rapidly a company’s stock price changes over time. For example, some growth-oriented companies can face drawdowns of -20% to -35% in a short-term correction. Are you willing to take the risk of your portfolio dropping down that much in a short period? If you are not, you are putting your money at risk.
2. Quantify the Risk
One of the key ways in which you can further quantify and analyze risk is through beta. Beta is a measure of the volatility of a security or portfolio compared to the stock market. The stock market’s beta is 1.0, with the S&P 500 typically used as the benchmark for the stock market. The higher the beta of a security, the higher the risk involved, which means that higher…
