Investment Risk Management 101 Tutorial Guide

Risk Management Teaches You How To Make More By Risking Less On Your Investments

Financial risk management is how you play the defensive half of the investment game.

The purpose of risk management is to ensure that your investment losses never exceed acceptable boundaries by following disciplined practices including position sizing, diversification, valuation, loss prevention, due diligence, and exit strategies.

"The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning." - Charles Tremper

The reason risk management is essential - not optional - is because the amount you lose during the tough times determines how much you must make during the good times to meet your financial goals.

You must preserve your capital during difficult periods so that your offensive investment strategy has a larger base of capital to grow from when profitable times return.

For example, imagine a football team with such an effective defense (risk management strategy) that they never give up a first down to their opponent. This team will be very tough to beat because their offense doesn't have to score many points to win, and they will have most of the game to do it since the defense will spend so little time on the field.

The same is true with investing.

Financial risk management controls the investment game. It keeps the line of scrimmage near break even so the offense doesn't have to make up for losses when executing the next play.

It preserves capital when the opponent is pounding away at you so that the next touchdown is new profit rather than recovered losses.

Investing without risk management is like being a quarterback without a front line to protect you - eventually you will get slaughtered.

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In other words, investment risk management is the secret to safe, consistent profits in any market condition.

Few investors understand that without a proper risk management plan you are literally one bad investment from the poor house. By managing risks you can reduce the odds of financial destruction to as close to zero as mathematically possible.

If your objective is financial security, then risk management should be your primary focus.

Remember, you can't make money when you are busy losing it.

To learn more about investment risk management please see the following articles...

Below you’ll find a listing of our most recent articles about investment risk management providing you with additional strategies and information so you can take the next step...

Four Stages To Consistently Profitable Investing

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Do you want to learn how to become a consistently profitable investor? You must first determine which stage you’re at now, before you can advance to the next level. There is a natural progression in investment skill. Each builds on the next brick by brick. Discover the steps you must take to achieve consistent profits, and the best strategy for advancing to the next level…

Five “Must Ask” Due Diligence Questions Before Making Any Investment

Investment due diligence separates the amateurs from the pros. Learn the five "must ask" due diligence questions to improve profits.

An ounce of prevention is worth a pound of cure. Cliche, but true. And nowhere is it more true than investment due diligence. I’ve saved my coaching clients hundreds of thousands of dollars using the exact techniques taught in this article to easily detect bad deals before a single penny was lost. Use this article to help you avoid the next big investment mistake…

10 Commandments of Investment Strategy

Abide by these 10 commandments for success with your investment strategy.

Nothing is more financially dangerous than a million dollar investment portfolio managed with a thousand dollars worth of financial intelligence. The truth is your investment skills and knowledge will be reflected in your investment results. Use these 10 critical commandments to improve your investment performance so that you can enjoy greater investment confidence and financial security as a result…

Peer To Peer Lending Review – Dangers Revealed

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In a world of zero percent interest rates peer to peer lending can look mighty tempting. Investor’s are starving for yield and P2P lending companies have risen to satisfy that need. Don’t be deceived. Look behind the emotional facade at default rates, unknown risks, operating difficulties and more so you can make a smart investment decision…

The Great Bond Bubble Is Now! What’s Next…

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What does the bond market today have in common with the stock market in 1998-2000 and the real estate market in 2006-2007? They were all ridiculous bubbles that ended very badly for investors. This is not a prediction. It is simple risk vs. reward analysis based on valuations. It is something that can save your portfolio from massive losses when you understand how it works. Learn how…

What Is A Good Investment?

Understand what a good investment is and looks like.

There is no such thing as an inherently good or bad investment. It is a myth. All assets can be good or bad investment given the right strategy, timing, or price. It is all about process – not product. Let’s see how this works…

New Bull Market Or Bear Market Rally?

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The critical question for investors today is whether the current rally is a new bull market or just a correction of the recent bear market that has likely already run its course? To answer that question you must understand the following…

The Solution To Investment Losses

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A reader commented on my blog, “Todd, my portfolio is mauled. I feel stuck and don’t know what to do. Any suggestions?” The simple answer is problems like this are avoided through a disciplined investment risk management strategy and the damage will be repaired only after improving your investment risk management skills. Every day you face a decision to buy, hold or sell. When you make no decision you effectively choose to buy your portfolio that day because it keeps the risk…