Every individual at some point in their life will face some hard decisions that involves risk. It doesn’t matter if it is for business decisions of just life choices. People optimize risk on day-to-day bases in everyday life. Some decisions are easier to handle, others require more analyzing in order to lower the risk and expand our reward.
Bigger risk doesn’t necessarily mean a bigger reward. In practice, if some specific situation is not analyzed properly you can get a smaller reward with a bigger risk. That is why it is very important to estimate our risk-taking reward and find out if it is cost-effective.
Risk isn’t a bad thing and sometimes can be a huge motivator for success. However, we need a better understanding of the types of risk we are willing to take in order to succeed in the business.
In this article, we will go through some of the practices that will lower your risk and will ensure that you have a better understanding of the actions you are about to take.
Determine your tolerance to different kinds of risk
As we mentioned, the understanding of the risks is essential in reducing them. Risk tolerance explains the size of the risk that you can take without impacting your lifestyle. This can be determined by your net worth and risk capital. Your net worth can be determined from your assets minus your liabilities and risk capital is the amount of money that if you lose, it will not impact your lifestyle.
If you have higher net worth and also big risk capital, you can afford to have higher risk tolerance. However, if your net worth is low and you do not possess much risk capital, you are probably better off with low-risk investments.
Research is important
Of course, this is one of the crucial elements in lowering your risk. You cannot go all-in on an investment that you don’t know much about. At this point, you can do every research possible in order to find out if the risk is worth it. You must check investment histories, earnings growth, market potential, industry trends, product trends and much more. The more information you have, you stand a better chance of determining if the investment is the right choice.
Diversity of investment
This method is a much safer approach to investing. It means that you will divide your investment into four smaller amounts. This will also lower the investment risk on every option. For example, if you want to invest $100 in stocks in some company, you should invest $25 in four companies. If one of the company’s stocks goes up, you can re-invest more. However, if the stock goes down, you will lose a lot less money. This method can be applied only if you are trying to invest in a couple opportunities.
Monitor investments and allocate
Monitoring your investments can significantly lower your risk and loss, just because you can take action if you sense that something is not as it should be. If you don’t follow and analyze your investment, it can turn up into catastrophic loss.
Of course, tracking and analyzing investment requires experience and finding new trends. In other words, predicting the future with numbers. For example, if you invest some amount of money in one business and you determine that the risk of losing the money is getting bigger, you should probably research some other business to allocate your funds.
Sometimes this is not possible within one business. However, this procedure is a very popular method within the stock market.
Estimate timing and future value
Sometimes investments will not show its full potential from the start. You have to find that sweet spot when you are certain that your investment has reached its maximum. If you pull out or allocate your capital too early, you will lose the chance of succeeding.
You must estimate how much value that company creates now and how much it will create in the future. The value of the business is also a very important factor in lowering your risk, just because it will boost your capital without any investment rises.
There are many methods that we can use to lower the risk on our investments, however, sometimes the risk can be unpredictable as a horse race. You should always be prepared for the plan of actions you are about to take, but sometimes as it is said, fortune favors the brave by involving the bigger risk that can pay off.