How Investors Can Manage Stock Market Risk
After understanding the different types of stock market risk for both the investor and the stock you buy, isn’t it obvious to then understand how to manage that risk? After all, what often separates a savvy and successful investor from the crowd is how well they manage risk.
Want to know how?
Read on to understand the different ways an investor can both manage and minimize stock market risk.
Also read: Decoded: 20 basic stock market terms you need to know before you get started
Have a diversified portfolio
One of the best ways to combat stock market risk is to have a diversified portfolio. When investing in stocks, avoid limiting your stock selection to a particular sector, industry or company size (such as large caps, small caps and mid caps).
The more you diversify into different sectors or industries like telecommunications, finance, agriculture, etc., the more your portfolio expands and your tendencies decrease. A diversified portfolio also helps combat market volatility by balancing risk.
For example, when stocks in a particular sector are not performing well due to internal or external factors, your portfolio can bleed red. In this case, if you need urgent funds and you have to buy back those shares, you will end up sitting on a pile of losses, right?
This is exactly where a diversified portfolio would come in handy. With a diversified portfolio, the underperformance or turbulence of stocks in one particular sector can be offset or offset by gains in another sector/industry. In this way, the overall risk of your portfolio is reduced and your chances of incurring losses are also reduced. So it certainly makes sense to hold a diversified portfolio when investing in the stock market.
Take advantage of the ebb and flow of the market
Stock traders and investors generally tend to panic or question their investment strategies when market volatility increases, especially in the case of novice investors who are still finding their feet in the market.
These investors are often tempted to follow the crowd during market ebbs and flows. The inevitable fluctuations in the stock market are often capable of giving such investors nightmares, which often leads them to make bad decisions.
It is exactly in such scenarios that people should let go of their fear and instead profit from market fluctuations. Remember that a wise person learns from their mistakes. But a wiser learns from the mistakes of others! So watch and learn from the mistakes others make in addition to reflecting on your actions.
When the market bleeds and a pessimistic mood drives stock prices down, take advantage and seize the opportunity to invest in that stock. And when the market turns bullish again and stock prices go up, sell those stocks and as a result earn high profits! This way, you are able to turn the otherwise scary and “risky” situation of a market correction or bust into a great opportunity to buy the dip and earn great returns.
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Do not be swayed by fear or greed
Emotions are one of an investor’s greatest enemies. The twin emotions of fear and greed often cause people to make poor investment decisions.
On the one hand, the emotion of greed leads investors to increase their investments in bull market conditions, while high valuations should rather worry them because it often indicates a possible overvaluation or a market bubble on the verge of collapse. ‘to burst.
On the other hand, the emotion of fear is what causes investors to panic and redeem their existing investments or stop making additional investments during market corrections or crashes, when stocks are actually available for be seized at attractive valuations! Either way, these twin emotions increase the risk of making bad decisions.
That’s why it’s about preventing these emotions from clouding your rational decision-making. Resist the “obvious” urge to panic, feel fearful, or greedy in extreme market conditions or fluctuations, and instead stick to the basics of investing and opt for rational decision-making in order to obtain good returns instead of sitting on a pile of losses like most of the crowd.
Do not invest and do not forget!
Another mistake that increases the risk for stock market investors of holding underperforming portfolios and incurring losses is the lack of periodic portfolio review. No matter how much research you did on a stock before buying it, it’s just as important to track its performance and review your portfolio. from time to time.
This helps to detect not only underperforming stocks in a timely manner that may be better off selling instead of holding them unnecessarily in your portfolio, but also helps to sell top performing stocks in a timely manner.
Additionally, if you have a specific financial goal and investment horizon related to the portfolio, such as building up a down payment for a house or car, retirement capital, etc., it is crucial to review your time the performance of the stocks you have chosen over time. This would help weed out and replace underperforming stocks with better performing stocks, which would help you hit target corpus/returns.
Also Read: Explained: Sensex, Nifty and Their Role in the Indian Stock Market
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