2020 saw some of the greatest market price swings happen. Of course, some investors were scared off by the volatility, particularly because of the ongoing global pandemic, but it also attracted others who want to tap into the volatility and make high profits. Every investor should remember that rather than withdrawing your investment, it is better to use risk management tips that can help you in minimizing your risks. What are they? Shay Benhamou has pointed out some risk management tips that every investor can use:
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Know what you can afford to lose
Before you begin investing, Shay Benhamou recommends that you first decide how much you can lose comfortably without stressing yourself out. This can actually help you in weathering volatile days in the market in a better way. It is referred to as your risk tolerance and everyone’s risk tolerance tends to vary. If you don’t know what yours is, you can consult a financial advisor to find out.
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Come up with a plan
According to Shay Benhamou, you cannot learn how to manage your risks until you have a goal along with a written plan for your capital. After all, the goal and the kind of risks you will have to take for achieving said goal need to align. You can take a look at historical returns to determine what kind of returns you can expect to make from an investment. This can also be helpful in avoiding recency bias, which essentially refers to the belief that the current market conditions will prevail. A review of the previous market actions will indicate how corrections and drops occur. This can tell you what to expect, so you don’t get any surprises.
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Cover your bases
Investment in the financial markets went up the previous year because people were spending more time at home due to the coronavirus pandemic. As per Shay Benhamou, there is no harm in experimenting, but before you experiment with any form of investing, you need to cover your bases first. This means having an emergency fund that holds money for your expenses for three to six months. It can also include insurance for yourself or your family members in case something goes wrong and you suffer from a loss.
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Understand the different types of risk
An important thing to remember is that risk is not ‘good or evil’. Experts like Shay Benhamou will tell you that understanding risk means knowing when to play it safe and when to take the risk. There are three different types of risk; mathematical, behavioral, and emotional. The first refers to the number of risks investors should take for achieving their goals. The second refers to the number of risks investors may have taken previously and their reaction when prices fell. The third refers to how investors feel when prices go up or down. Most of the time, these risks agree, but if they don’t, Shay Benhamou suggests that you don’t let the emotional risk ever overcome the mathematical one.
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Diversify your portfolio
It is one thing for an investor to consider making a small bet on a hot stock like that of Tesla, but putting all of their money in just one investment is a whole different ball game altogether. When you are a new investor, Shay Benhamou suggests that you go for broader diversification, as you probably don’t have a lot of money to invest in the market, or don’t have a lot of money to lose.
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Don’t time the market
This is certainly not easy to do and as Shay Benhamou says, even professionals cannot get it right most of the time. Investors should remember that the key to building wealth is consistency and nothing else. Trying to time the market will only make you miss out on some good opportunities. You can just add small amounts to your long-term aim regularly, regardless of market conditions and it will pay off eventually.