Manage Market Risks

Markets have been volatile recently.  Valuewalk just laid out a plan to manage market risks.

“Don’t shy away from volatility: High price volatility creates opportunity for the adept and disciplined investors. Recent research has shown that higher price volatility in traded securities has correlated with higher investment returns. Forget the experts: volatility usually is your friend.

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Recalibrate your view of illiquidity: Most investment experts view illiquidity as risk. But no one quantifies the degree of illiquidity. Many publicly traded securities become hard to trade in during market convulsions. This has become worse with the increase in index funds, together with open-end mutual funds. Both are equity investments with overnight funding, and must buy and sell at the caprice of their investors. Many non-publicly traded investments can be bought and sold within 30 days, albeit with disadvantaged pricing. Yet, private investments usually offer higher returns and more control. Especially if you can buy larger investments, illiquidity is your friend over the long term.” Read more…

Generally speaking, whenever you invest your money in the stock market, you take on a certain amount of risk. While there is no way to get around that risk, it is possible to manage your risk by educating yourself before you start trading.

One of the most important things to remember about any investment, is that if your capital is borrowed, you take on an even greater risk than the actual investment itself. It is never a good idea to borrow, either from a lending institution or from your credit cards, to come up with the money you need for any particular investment. This maximizes your risk in that, if the investment doesn’t pan out, you will still have to repay the amount you borrowed, and may even have to pay penalties depending on your financial position and ability to repay.

Make sure that before you start trading, you have planned ahead and set aside the capital you will need to invest. This will eliminate that third party, and ensure all of your profits will go in your pocket, and not some bank’s ledger. Keep in mind, though, not only will you need the money for your capital, but also for the most expensive part of the stock market – brokers fees.

While each broker will have different rates, most charge a flat fee per trade. These flat fees make it much easier to see a return on your investment much sooner than you would with a variable rate. This also means that, if you are starting with a fairly large investment of perhaps $10,000, and the brokers trading fee was a $100 flat rate per trade, you would only have to see a one percent return to break even. Of course the reverse is also true, in that if you are starting with a smaller investment of only $1000 or so, you would have to see at least a ten percent return to do the same.

Your rate of return will also depend on whether you are investing in a short term or long term system. In a short term system, you will have many more trading fees, since it is based on the buy low, sell high, do it now philosophy. With a long term system, however, you will incur far fewer trading fees due to the fact that with a long term investment, you are investing in the future viability of a company, rather than in an immediate merger or other change.

Managing your money wisely will help to manage your risk. But it is important to remember that even when your monetary risk has been considered, there is always the market risk. That is to say that there is always the chance that when you invest in the stock market today, there is no guarantee that the market will exist tomorrow. There are no guarantees in stock market trading, and there is no way to eliminate your risks entirely. But with good financial planning, and a little common sense, stock investments can be a wonderful way to provide money for your future.