What is financial risk and why is it so important when investing?
Find out simple formulas to reduce it
Why is risk one of the first factors people should consider when investing? Because as the Zona Económica site explains, every investment inherently carries a risk, which in turn is defined as the probability that the return will be less than expected.
This can also be understood by the almost directly proportional relationship that exists between the risk and the return of an investment, which is the same as saying that the riskier an investment is, the more possibilities there are for its value to grow or decrease.
However, in the event that you are faced with two types of investment with equal levels of risk, you will surely prefer the one with the highest profitability. Or if it also happens to you that you have the option of investing in two products with equal profitability, it would be best to choose the one with the lowest risk.
Thus, there are several elements that will help you not only guide your future investments, but will also allow you to reduce the risk levels associated with each of the financial products available on the market for investment.
What are the ways to reduce the risk of your investment?
Know what type of investor you are according to the risk you are willing to tolerate
There are multiple ways to find out the type of investor you are. There are even hundreds of free tests on the Internet that help you define it, such as the one from the Commission for the Financial Market (CMF) and it takes only two minutes to do it.
Here, the risk factor is always taken into consideration: how willing are you to risk your money, what capacity do you have to face losses in case your investment generates them, or if you believe that the possibility of loss compensates the profitability, are some of the questions that help you to know the type of investor you are.
Being clear about this will not only allow you to know the expected returns through the choice of the appropriate financial instruments for your profile, but even better, it will mark the first step to start reducing the financial risk of your investment, beyond the only fact of finding you more prepared.
Inform you from investment products to market movements
According to the Invoicedo site, having enough information about the financial assets that exist in the market to invest, as well as knowing and evaluating their profitability, is one of the first ways to minimize risk.
Likewise, being informed about the changes that are taking place at an economic, political and financial level, both in the country and in the world, allows investors to anticipate what may happen in the future, but also to build a strategy to manage its different products better.
It is that investments, in most cases, are affected by the movements that the market is experiencing. For the same reason, every self-respecting investor should not only dedicate time to these, but also be prepared to react to any eventuality that affects the risk of their investment.
Diversifying is the golden rule of investments
Last, but not least, is to diversify through an investment portfolio that balances high-risk trades with those that are safer. As established by the CMF, this would be the best alternative to achieve the expected returns and reduce investment risk.
In other words, it is to imitate the logic of “not putting all your eggs in the same basket”, because since all financial instruments have a different profitability, then it is possible to compensate the bad results of one with the good performance of another. Thus, the entire portfolio tends to have a less fluctuating return.
Here, point 2 becomes even more important, which recommends being fully informed not only of all the investment products that are available on the market, but also of their variables (profitability, liquidity, risk and investment horizon) and the purpose of your investment.
In short, understand the business.
As with everything, in order for you to do well in the world of investments, it is also necessary to invest time in researching how the market and its variables work, define what position you will take in this regard, and question any aspect that may represent a risk for your business.
Originally posted 2023-02-02 10:21:46.