Portfolio risk is something that investors at all levels must manage on a constant basis. Let’s look at how to measure risk in a portfolio. And then how to manage that risk based on long and short term goals.
What is risk when it comes to investing? You have different risks when investing in any financial instrument. You take a risk that the managers of the asset will not manage it properly and the underlying value of the investment will erode accordingly. You also take the risk that the instrument is overvalued when you purchase their investment. You take the risk that when you need to sell the investment, its value will be lower than when you initially bought it.
When looking at a portfolio, you need to assess all three of these risks on each asset in the mixture. One of the most common ways to reduce risk in a portfolio is to diversify. Diversification can take many forms in a portfolio. For example, you can diversify your stock portfolio by adding fixed income securities to the mixture. You can diversify your long-term portfolio by adding some short and medium term assets to the mixture. You can diversify your single stock portfolio by adding stock from other companies.
Everyone has a different comfort level when it comes to risk. It can come down to the person’s personal comfort level with finances and investing. It can also come down to why they are investing at a particular time in life. A young person without a spouse or children is more likely to be willing to invest in high risk financial assets. A person with a spouse and children may want a less risky portfolio mixture that also grows at a healthy rate. As they approach retirement, many want to remove most of the volatility from their portfolio to steady their income levels.
The risk in trading portfolios can be more volatile than in investment portfolios. Investment portfolios focus on the longer term gains. The trading portfolio is usually created with the short and medium term in mind. In order to make shorter and medium term profits, the trader has to take a higher risk when choosing investments. They have the potential to pay off in larger amounts. However, they also pose a risk of a large loss in the short term also. An investment professional is a great person to help you choose your portfolio mixture.