Investment is often conceived in terms of some ratio of risks to returns. There is merit in adopting this approach, especially for retail investors, since it helps one take better investment decisions in the long- and short-run. However, it’s also important to know investment-related risks, as it makes you a better investor. Read on as we discuss five solid portfolio risk management strategies to help you mitigate every risk in your investment portfolio.
1. Diversify your risks
One of the critical strategies to make your portfolio secure is to diversify it. As an investor who wishes to mitigate risks in their portfolio, you must divide your investment capital into various asset classes such as stocks, bonds, commodities, treasury bills, cash deposits, and real estate. You must also ensure that diversification exists within asset classes too.
For example, you must refrain from buying only the stocks of a particular company using your investment capital. Any event that affects a specific domain or a set of disciplines in the market cannot disrupt a diversified portfolio completely.
2. Undertake asset allocation
Focus on your asset allocation. Picking your assets is just as important as diversifying them. It is critical to carry out a thorough investment risk analysis to prioritize asset allocation. Any investor’s portfolio risk analysis will depend on their age and lifestyle. If you are a young investor, you can opt for riskier investment options, such as equities. If you are advanced in age, you could consider opting for less risky investment options.
3. Consider your time horizon
An essential part of your portfolio’s risk analysis must be your investment horizon. It is the duration for which you intend to invest your capital in an investment. The time horizon is divided into three parts generally while carrying out an investment risk analysis.
Short-term investments have a time horizon of 1-4 years. Medium term-investments are 5-10 years long in terms of time horizon, and long-term investments have a longer time horizon. While practicing investment risk management, you must also consider your investment’s time horizon.
4. Prioritize liquidity
As an investor, you must always invest a portion of your capital in securities with higher liquidity. Access to cash always helps in a financial emergency or an emergency of any other kind, which is why allocating a part of your investment capital to high-liquidity assets is helpful in investment and risk management.
5. Avoid portfolio volatility
You must also try your best to avoid high volatility. While market volatility cannot be controlled, you can keep making changes to your portfolio to help you mitigate portfolio risk to a great extent. Volatility is a significant portfolio risk that can significantly affect your long-term and short-term returns.
Portfolio risk management strategies are best designed keeping in mind your overall portfolio risk. Following the points discussed above can help you mitigate risk and carry out a precise and helpful portfolio risk analysis.