Posted By : Kishore B.S
When there is a risk involved, it is obvious that hesitation increases. Hesitation leaves you two ways, either to take risk or leave it. But remember what Albert Einstein once said,”..a ship is always safe at the shore, but that is not what it is built for.”
So why not take the risk and play the game, rather than just settling for safety without progression, which in itself is a disaster. Same goes for investment. There is always a risk involved, but at the end of the day, those who dare to take it, are rewarded and the rest of the chunk gains nothing at all.
Yes! you will lose money at times, and as a matter of fact -all the investors do. But no one stops you to act sensible and analyze the risks you can afford. Defining what sorts of risks are involved in the financial investments is how I can begin with encouraging you face it.
The risk can be chopped into two parts – Systematic and Unsystematic Risks. Systematic Risk is risk deep-rooted to the entire market, volatile in nature, which does not just affect any particular company, but the overall market. Such risks are hard or you can say impossible to predict as well as control. Variability of interest rates, Market risk, i.e. due to volatility of price changes, foreign exchange fluctuation, inconsistent method of training etc. and Inflationary Risks are some of the examples of Un-diversifiable risk or Systematic risk.
Unsystematic Risk on the contrary, is micro in nature, based on the performance of individual company, which of course is controllable. Such risks are identified as Business Risks, Financial Risks and Operations Risks which are performance indicators of any company.
The definitions above should shift your focus on the unsystematic risk, because spotlight should be on the curse that can be cured and Diversification is name of that cure. It is the way of crafting your investment pattern in such a way that you can minimize your risk by investing in different range of stocks or other investments. This elixir does not ensure you gains, but sets the appropriate risk tolerance level for an investor.
You should stop being conservative by investing low proportion of your capital in single stock. Act like a cowboy, courageous enough to ride a bull and invest in diverse portfolio of stocks and assets. The less the correlated investments you have in your portfolio, more efficient would be the tradeoff between risk and return. Keep your portfolio in between 10-20, because it is better this way to keep track, review and rebalance your investments.
There is no way at all to eliminate all the risk of investing, but choosing the right mix of investments and doing your homework, is a must for keeping a balance between risk and reward.
Stock Market Institute, Bangalore.