Ways to Manage Investment Portfolio Risk

Investment Portfolio Risk Includes the following;

1. Follow the Trend

The trend is your friend until it ends. One way to manage Investment Portfolio Risk is to commit to only buying stocks or Exchange Traded Funds(ETFs). That are in an uptrend and to sell them once they violate their trend line support. You can draw your own trend lines by connecting a series of higher lows on a chart. Or you can use a moving average like the 50-day or 200-day to act as support. If the price breaks that support level by a predetermined amount, you sell.

2. Re-balancing

Longer term investors may try to manage risk by selling stock investment. Or asset classes that have come to take up too much of their portfolios. They will sell off those assets and buy more of the stocks or ETFs that have underperformed. This can be a forced means of buying low and selling high.

3. Position Sizing

Another way to play defense is to limit your exposure. If a given investment is riskier than others, you can choose not to invest in it. Or to invest only a small amount of your capital. Many investors use this type of approach to gain exposure to riskier sectors like biotechnology. A 50% loss on a $2,000 investment hurts a lot less than it would on a $20,000 investment. The easiest way to lower your stock market risk is to shift some of your capital to cash.

4. Stop Loss Orders

You can place a stop loss order with your broker that will sell out all. Or part of your position in a given stock or ETF if it falls below a preset price point. Of course, the trick is to set the price low enough that you won’t get stopped out on a routine pullback. But high enough that you will limit your capital loss. Placing a stop loss order is one way to limit the damage to your portfolio. And also force yourself to follow a strict defensive discipline. Moving or ignoring stop loss levels almost always results in greater losses in the end. The first exit is the best exit.

5. Diversification

The idea behind investment diversification is to buy asset classes or sectors that are not correlated. That means that if one goes up, the other is going down. Diversification has been a lot more difficult to achieve over the past few years as many asset classes have become correlated. Even stocks and bonds have been moving in the same direction much more often than in the past. Diversification is a good strategy to limit your risk. But it only works if the assets you buy are uncorrelated. Make sure you look at recent performance rather than relying on historical relationships that may no longer be working.

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