Risk Management

Risk Management - What?

If you want to describe the meaning of risk management in one sentence, you could say «Risk management protects the portfolio from major impairments.».

In theory, risk is defined as volatility (range of fluctuation). Volatility is calculated from the amount of negative and positive price movements. But positive price movements are not a disadvantage for us, they are an advantage. Risk is and remains an individual assessment.

What are the risks?

There are many risks on the stock market. You can protect yourself well against some risks and less well against others.

The graphic lists six risks:

• Potential risk
• Market risk
• Liquidity risk
• Credit risk
• Concentration risk
• Foreign exchange risk
• Inflation risk

In practice, the risks manifest themselves in possible economic downturns, in which usually 90% of stock prices fall. Other risks arise from the poor management of individual companies. 

How can you protect yourself from risks?

There are several ways to protect yourself from risk.

• Diversification in asset classes
• Diversification in sectors and industries
• Diversification in geographical regions
• Diversification with different investment strategies
• This approach not only brings diversification, but also solves the problem of timing.
• Analysis of the economic outlook for individual economic areas
• Do Money-Management

Summary

In practice, the risks manifest themselves in possible economic downturns, in which usually 90% of stock prices fall. Other risks arise from the poor management of individual companies. 

For you as an investor it is important to protect your portfolio from existential risks. Diversify your portfolio and manage your money. Not every investment can work. Diversify your risks and manage your money. Do not put all your eggs in one basket.