Key Principles of Managing Investment Risk

Risk management plays an important role in investing success. Every investment regardless of type poses significant potential risk particularly the risk of mismanagement or the risk of overvalued investment.

Risk management involves the identification of investment risks, the assessment of the investment and the application of several accepted risk management principles. In order to secure and profit from an investment, investors and venture capitalists must apply the following tried and tested risk management practices.

Establish goals and objectives

The first and foremost step in effectively managing investment risk is to establish goals and objectives. Every investor has a purpose for investing. Investors invest for a couple of reasons such as to preserve wealth, to establish a retirement fund or to profit from fluctuations in prices.

Goals and objectives serve as your end point which further fuels your desire.

Assess your personality as an investor

Investors are different. They have different philosophies and purposes with regards to money and investing. Some are conservative investors while some are gamblers. Some would prefer high-yield; high-risk investments while some are contented with small yet constant returns.

Ask yourself what kind of an investor you are and build on such personality. You must only invest in investment vehicles which are in line with your personality as an investor.

Take part in the decision making process of the company

As a stockholder, you are a part-owner of the company. Thus, you have the right to take part in the decision and policy making processes of the company. Stockholders have the right to vote and to choose their company’s representatives.

Stockholders can also address issues and provide feedback and suggestions to the managers and even to the Board of Directors (B.O.D.) There are a lot of ways on how an ordinary stockholder can make a difference in a large company – they just have to be creative with their approach.

Diversify your investments

Diversification of investments is a proven method to reduce investment risk. Putting all your eggs in a single basket is the worse possible mistake you could ever do. Investors should spread their money on different investment types such as stocks, bonds and mutual funds.

Investing in different companies is also a proven way to reduce business and valuation risks.

In the event of a collapse in a particular investment type, a diversified investor’s loss is reduced. Moreover, diversification is highly recommended by financial experts, economists and stock brokers.