How to manage your risk when investing

Whether it be switching jobs, travelling overseas, climbing a mountain or investing – almost everything in life comes with an element of risk. Luckily, the power to understand and manage that risk lies with a pretty savvy individual…you!

What are the risks?

Whether you invest in an individual business or a broader sharemarket index like the S&P/ASX 200, the price of shares can rise and fall. So it’s only natural that you may see your investments fluctuate.

Actions taken by a business can influence its share price, as well as external factors like a global pandemic or conflict overseas. While these are things you have less control over, the decision to buy or sell lies in your hands.

If you sell a share for a price that is lower or the same as what you initially paid, taking into account brokerage fees, you’ll make a capital loss.

How much risk should I take on?

Your age and investment timeframe can help you decide on your risk comfort level. For example, if you’re in your 20s and plan on investing well into your 60s, you may be able to withstand sharemarket peaks and dips better than someone with a shorter investment timeframe.

Your lifestyle and personality are also factors you can use to gauge how much risk you can tolerate. You would ideally want to invest an amount that, even in the worst case scenario, won’t have a major impact on your lifestyle.

How can I manage risk?

Diversifying your share portfolio, rather than putting all your money into one company or industry, could help mitigate potential risks. This means spreading your investments across a range of sectors, like energy, financials and healthcare, and having a mix of larger and smaller companies in your portfolio. You can even diversify by considering other “asset classes”, such as property, bonds etc.

Exchange traded funds (ETFs), which give you exposure to a bunch of different companies, assets or industries, are one option to help diversify your portfolio.

Tools to help manage risk

There are plenty of tools available to help you manage risk, but a good place to start is usually with the stock broker you trade with.

With CommSec, you can get a quick snapshot of how diversified your shares are across different industries and whether you’re overexposed to a particular sector. And, the share quality health check will tell you how experts rate your shares, and whether other investors are buying or selling the shares that you hold.

A difficult decision to make when investing is knowing when to sell. If the share price of a company in your portfolio starts to drop, you might feel torn between selling to avoid any future losses, or holding on for a potential rebound. Setting up a conditional order through your CommSec account can help you manage these decisions. It means you can automatically place a sell order if your share falls to a particular price, based on your risk tolerance. This may be helpful for those who aren’t constantly monitoring the sharemarket and want to safeguard themselves from a sudden drop in price.

4 ways to manage risk

While most investments carry some form of risk, there are ways to mitigate these risks. For example:

1. Diversify your investments

2. Keep a close eye on your portfolio

3. Use dollar cost averaging to reduce your market-timing risk

4. Do your research before taking on any investment

If you’d like to learn more about investing, head over here.