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.”
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 a defense (risk management strategy) so great 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. In other words, investment risk management is the secret to safe, consistent profits in any market condition.
Few investors understand that without proper risk management 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…
Due Diligence: Five “Must-Ask” Questions Before Making Any Investment – Learn what due diligence questions to ask so that you can avoid losing investments before they cost you money.
How My Worst Investment Made Me Wealthy: How you manage investment losses will ultimately determine your profits. Learn which investment strategy makes the most of a bad situation.
Four Stages To Consistently Profitable Investing: Discover which investing stage you are at now, and learn how you can jump to the next stage to become a more profitable investor.