Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Can you curb investment risk? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jun 12, 2013

    Can you curb investment risk?

    Webster dictionary defines risk as the possibility of loss or injury. This is a possibility we face in every sphere of our lives. And investing is no different. In investing, the risk comes in the form of the possibility of the returns being different from what we expect or want. In an extreme case it is the possibility of losing part or whole of our original investment.

    But equally popular in investing is the concept that with high risks you get high rewards. This is because of the premium that the investment avenue provides investors to compensate them for the higher risk involved. This is the concept that has led many an investor to burn their fingers because they took too much risk. Therefore there is a need to balance and manage your risk properly.

    To understand how to do this, the first step is to know what the various risks that influence your investments are. All investment related risk can be broadly classified under four categories.

    1. Company specific risk - These are the risks inherent to the company. Company specific risk includes operating history, management depth, access to resources, customer diversification, purchasing power. These are risks that would affect the company's operations and reputation. From the abovementioned examples, one thing is quite clear. Not all of these risks can be quantified. Therefore, investors need to use several qualitative factors to understand the extent and nature of this type of risk. If you don't factor in this risk, things could go terribly wrong. Remember the case of Satyam or even Suzlon Energy for that matter. They are classic examples of how company specific risk could destroy shareholders' wealth.
    2. Industry specific risk - These are the factors that influence all the companies in a particular industry. This includes the regulatory framework. Cyclicality of revenues. The competition in the sector. A look at the woes of the telecom sector would make you understand how industry risks can hurt the profitability of even the best of companies.
    3. Market risk - No company operates in isolation. Factors like interest rates, inflation, government changes, etc. are always at play. These factors directly and indirectly affect the operations of all companies. For example the depressed macroeconomic scenario of the country has had an adverse impact on the profitability of nearly all companies. Companies have seen margins come under pressure. Most companies are finding growth tough during such times. These factors constitute what is called the market risk.
    Having understood the components of risk, the next question is how does one reduce the risk in their investments. An important thing to understand here is that risk cannot be completely eliminated. Even the long term government bonds have some amount of risk inherent in them. Nevertheless, risk can be contained.

    One way of managing risk is by having the right asset allocation. While we are no experts at wealth management we have always stressed on the need to have cash and gold in your portfolios. This acts as a safety net particularly when the times are bad. In addition to this even for equities we suggest that you do not put too much money in a single stock or sector. That is why we advise our subscribers to have a well-diversified equity portfolio comprising the appropriate proportion of small cap, mid cap and large cap/ blue-chip stocks. Based on their relative riskiness, we have created an asset allocation pyramid that can help you in deciding how much money you should invest in a stock. However, it must be noted that the allocation levels could differ from person to person depending on the risk appetite.

    Another way of managing the risk is by having a checklist in place. This lists out all the key variables that influence all stocks. The list includes parameters related to the company's financial performance, the industry in which it operates as well as its management quality and financial strength. This checklist can be used as a reference point for analyzing any stock.

    To conclude there are several risks that are inherent in investing. The best way in which investors can manage and reduce these risks is by first understanding all the possible ways in which they can lose money. Once you know this, then you can work out intelligent ways to eliminate or reduce these possibilities. The beauty of investing is that each market in which we invest gives us the opportunities that can be exploited to manage risk. What we need to do is to do our homework on these opportunities so that we can identify and deal with them. Once we know how to deal with it, then risk no longer remains a scary word.



    Equitymaster requests your view! Post a comment on "Can you curb investment risk?". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 21, 2017 10:52 AM