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Risk Management Practices

The most important question to ask when considering any investment opportunity is, “How much money can I lose?” Being a successful investor requires patience and caution. Since I am not naturally wired with these faculties, I have to make a conscious effort to pause and ask myself these risk management questions:

 

  1. How much can I lose if things do not work out as I hope?
  2. How can I minimize the amount of loss?

Asking these questions gives me time to contemplate risk management tactics and helps get my emotions out of the way. Once I take care of the potential risk, then I can focus on the fun part—making money!

Most people who are new to investing are focused on the potential upside, chasing the latest hot opportunity. They are not inclined to think about what would happen if the best-case scenario doesn’t happen (and it rarely does). Every person has a different risk tolerance, but investors who employ prudent risk management strategies usually enjoy steady wealth growth and experience much less worry and stress.

Longer Term Investment Timeline Decreases Risk

Trading does not equate to investing. There are a lot of day-traders—people who trade in-and-out within few days by taking advantage of short-term market fluctuations. Very few short-term or day traders have acquired great wealth.

Investing, on the other hand, has a much longer time horizon and most asset classes—stocks, real estate, commodities—appreciate over a longer period of time. This is one more reason to research your investment choices very thoroughly and apply simple risk management approaches.

Furthermore, there are times when sitting tight/doing nothing is the best solution—don’t feel pressured to always buy or sell. It’s not the frequency of investing but rather the quality of your decisions over time that adds up to great wealth. Learn when to act and when to wait.

Read more on this topic next week.

To Your Health, Wealth and Happiness,

To learn more about Millen and her mission of Financial Freedom, click here

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