Key Principles of Managing Investment Risk

Whatever one invests in, whether it be bonds, stocks, mutual funds or other, there will always be an element of risk involved.  The financial outcome that is anticipated may not actually eventuate, and depending on the fluctuating fortunes of world markets and economies, any investment portfolio is always subject to the changing fiscal conditions of the times.  There are several strategies that can be employed to help manage and hopefully minimize any investment risk but a key point to remember is that your money is only as safe as the financial skill level of the person, or company, who is managing it.  The first, and most important, key principle of managing investment risk is to consult with professionals who have a proven track record of financial excellence and investment expertise. 

–  Making safer investments:

Technically there is no such thing as a totally guaranteed investment yet some forms of investing are considered to be safer and more risk manageable than others.  For the beginner investor it can make a lot of sense to start with some simpler, less complex options.  With increased market expertise, the average investor should be able to diversify more widely with their portfolio and build a larger nest egg of wealth.  Five simple and effective, lower risk, investment options include:  bank savings accounts, fixed annuities, certificates of deposit, money market accounts and government issued securities. 

–  Diversification:

Another key principle of managing investment risk is to diversify your portfolio by investing in a variety of options.  A spread across different asset classes, currencies and companies will lessen your chances of losing significant amounts of money if a particular investment strategy fails to pay a sufficient return.  An example of diversification would be to invest in a portion of each of stocks, bonds and cash – these three categories are independent of each other and are unlikely to all fail at the one time.  Another option would be to invest in a variety of industries from different countries – many investors stick to their country of origin but experience shows that this can be a very risky way to play the markets as regional crashes can occur quite suddenly.

–  Dollar Cost Averaging:

This particular risk management plan works with any type of currency and is based on the concept of investing a set amount of money at regular, evenly-spaced intervals, say $100 each month.  The money is invested in the one portfolio on a single type of investment; as the price of shares fluctuates over time, the overall cost tends to work out lower over time, giving a healthy fiscal bonus to investors.  Some market experts criticize the DCA strategy and prefer a more selective and calculated approach to investing, yet dollar cost averaging is used widely in the market by many experienced players.

–  Analysing market variables:

With any type of investment, it is important to keep informed of the state of the markets and the value of individual portfolios.  Fluctuations in fiscal performance and commercial trends should be especially watched with keen observation.  Market components that should be followed include inflation levels, interest rates, market volatility and legislation changes that pertain to investment markets.  Many people consider professional investment companies to be the major source of successful investment risk management but it pays to be aware of the fee levels that any particular firm charges and how these service fees could diminish the value of any return gained. 

–  Sources cited:

McMaster Securities Pty Ltd


The Financial Planning Center



Investment U

ABCs of Investing