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Risk and reward

How to Control Risk and Reap the Rewards from your Investments?

by Holistic Leave a Comment | Filed Under: Investments

“There is no gain without pain” is a common adage which many people believe in. Perhaps the gains which they have attained in the various spheres of life have been consistently greater than the proportion of risk and pain taken.
So what is it about ‘risk’? How does one identify risks beforehand and what measures do they take to safeguard themselves against such risks? While these questions are true for all aspects of our lives, for a serious investor ‘risk’ and its connotations acquire a high level of significance.

Let us try to define ‘risk’

The Merriam-Webster dictionary defines risk simply as “the possibility that something bad or unpleasant will happen”.
The business dictionary defines it as “A probability or threat of damage, injury, liability, loss or negative occurrences that are caused by external or internal vulnerabilities, which may be avoided through preemptive action”.

Now, that is quite a comprehensive definition and it gives a fair perception of risk.

An investor will perhaps like to substitute the word ‘avoided’ with ‘minimized’ in the definition above as market risks are an inherent part of the investor’s world.

Understanding Risk

Understanding Risk is a lesson which every investor needs to learn. An investor attracts risk when they invest in stock whose prices are above their intrinsic value. It is a certain move towards uncertainty and the probability of incurring loss due to capital erosion is a distinct possibility.

There exists a feeling amongst a section of investors’ that by taking more risks they gain more. This is nothing but a myth and has been proved historically and mathematically time and again. If the premise that greater risks leads to greater return would be true, then the element of risk would not exist and investors would be assured of good returns.

Investors often go ahead with a supposedly high-risk investment knowing well that they are treading on a treacherous path. Sometimes such investments do fetch handsome gains. They try to make a point that their dalliance with the risk factor helped them come up trumps.

For others watching from the sidelines, this move may be translated as courage and exceptional foresight, but what would happen if the investor touched a trough and lost everything instead of scaling the crest? It has to be understood that by shouldering undue risks the investor is only making his position vulnerable.

Unpredictability of the future is a cardinal truth. More often than not our perception regarding the worst scenario may be surpassed and this is usually what occurs. Very few people can actually understand and predict the future correctly on a consistent basis. The ability to assess how high a stock is priced above its intrinsic value is the key to understanding risk.

Recognizing Risk

Risks in the market are similar to winds in a storm. When the storm grows more fierce the wind speed increases causing more devastation. Risks, are no different, when the market rises, after a point, turbulence brews due to the occurrence of greater imbalances. This leads to a situation which is unpredictable and can cause the market to crash. The upheaval comes to a rest with the setting in of a recession.

The natural corollary to ‘understanding risk’ is ‘recognizing risk’. If people become very risk averse they will not pay heed to any warning or take cognizance of any perception of fear. It becomes a situation where “fools rush in where angels fear to tread” and they become tempted to purchase investments at high P/E multiples and wafer-thin spreads, depending on the class of asset.

Howard Marks has an interesting observation to make, he states that “The degree of risk present in the market derives from the behavior of the participants, not from the securities, strategies, and institutions. Regardless of what’s designed into market structures, risks will be low if investors behave prudently”.

It naturally follows that a financial climate which is healthy and safe will be characterized by risk aversion, skepticism, distrust, agnostic views, worry and awareness of the attitudes and behavior of its participants’.

The market cycle turns vicious as the demand for risky assets increases which in turn leads to a reduction in rates and yields. Investors who strive for greater returns in shorter periods bring more risk upon themselves.

When fixed return instruments begin to offer lower yields, investors get attracted to the capital market seeking to achieve commensurate or greater returns thus raising the risk bar a few notches higher. It needs to be remembered that this is not a market in which we operate but a market which operates because of us.

An ideal situation is one where all investors recognize risk and are averse to blind riskper se. This cuts out the aberrations which might otherwise crop up and the element of risk is mitigated.

Controlling Risks

Loss is the consequence of taking undue risks. The transformation of ‘risk’ into ‘loss’ occurs only when a catalyst acts upon risk and coverts it onto a loss. A parasite by itself might not cause damage but when it resides inside the body of a person and acts upon it, disease is caused.

Ability to control risks is what differentiates between a seasoned and a naïve investor. Positioning investments in a manner which negates or mitigates the risk element is the hallmark of a smart investor. It is very important for investors to be aware of two things which can prove to be effective safeguards against undue risk:

    I. You do not know

    II. You do not have the ability to control

This will result in making an objective assessment of risk factors associated with an investment and investing according to it. While an investor would definitely be congratulated during gloomy economic times, for investing in safe avenues like bonds and debt funds, a serious investor would want to have a larger pie and this is where the lessons on risk control can yield good results.

Practical Steps to control Risk

So at the end of the day here is what an average investor can do to avoid the pitfalls associated with too much risk:

I. Chart out an asset allocation based on age, risk taking propensity, and required rate of return

II. Identify the stocks or equity funds in which he or she is interested to invest

III. Make a thorough assessment of the stock, its price or valuations and its basic fundamentals

IV. If the risks associated with the stock or equity fund in either the short term or the long term is greater than normal (based on market knowledge as far as practicable), avoid such stocks or funds and look for better options for investment.

The above steps practiced diligently will help you control the risk and reap the reward from your investments.

A fool proof Risk Management Plan is an integral part of sound financial plan. If you are really interested in creating a fool proof risk management plan and sound financial plan, you may test-drive our services by opting for
 
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Lingesh MMG
Lingesh MMG
20. September, 2023.
Na eppo tha financial goal la enna therunju kitta..enaku full support panna thuku thank you..🥰 friendly nalla pesuninga...
Ravi L
Ravi L
15. August, 2023.
Very knowledgeable and professional team, guided me with the precise financial solutions and timely suggestions.
Hardik Dave
Hardik Dave
5. July, 2023.
Holistic Investment is really nice and trust worthy financial planner. They plan things in realistic manner and also consider future dimensions of items also. They are always available for small or big queries, and also share knowledge and help you become more financial literate, and take right decisions in all financial matters.
Dr. Padmakar Wagh
Dr. Padmakar Wagh
27. June, 2023.
Mr Ramalingam who is the Director of Holistic investments has a excellent financial planning knowledge, the entire Holistic team has been very helpful in my financial planning journey and execution. This is my third year of financial planning with Holistic investments and so far I am satisfied with the progress I have made.
Binamra Dash
Binamra Dash
13. June, 2023.
Very knowledgeable team. Guided me properly with my concerns.
Murugan Bala
Murugan Bala
16. May, 2023.
I have been investing through Holistic for the past 4 years and my experience with them have been really good. The team of Rajan and Ramalingam doing excellent services in meeting my needs through proper guidance on investment options customized. Theya re always available on any specific needs time to time.I would recommend their services to my friends and colleagues too.
Neeraja R K
Neeraja R K
15. May, 2023.
Working with holistic investment planners was a really wonderful experience for me. For me the entire team had been very supportive in all ways. Their working strategy is well planned and methodical. They always keep me informed and updated about my investments, so that i can take informed decisions. The team first helps us understand the basics of investments, then they collect data, work with the data and then provide investments solutions according to our goals which i find it the best. Good luck to the entire team.
deepika kulkarni
deepika kulkarni
21. April, 2023.
We have availed holistic service from last couple of years and are very happy with our decision. Their systematic approach has helped us plan our finances and meet our goals. They provide very comprehensive and detail plan and resource management every 6 months which ensures we are on right track to achieve our goals. Rajan and Ramalingam from holistic are always there to help us with our queries. They have also accommodated any changes to our goals or resources mid year in a professional manner.
Ashook Panneerselvam
Ashook Panneerselvam
21. March, 2023.
For the past year, I have been interacting with Holistic Investment. I frequently read Nanayam Vikatan, which is a publication owned by the Vikatan family, and I was impressed by their financial advice. My brother also suggested holistic investing, and he also got excellent financial advice. Holistic Investment follows a methodical approach that I really liked because they first fully understand our financial situation "As Is," which includes "Assets" and "Liabilities," as well as our short-, mid-, and long-term goals, on the basis of which they provide a detailed plan on how to achieve our goals for which they are recommending various investment options. Even in the investment advice, why do they suggest particular mutual funds and what is the justification behind it, which adds transparency to the client. One essential factor is that they are always available. Even if I needed to make some urgent financial decisions, they were very helpful and kind to answer my questions via phone calls, WhatsApp messages, and emails. I was very happy with their service. Periodic reviews are also crucial, even though I have forgotten that they occur once every three months, and I also intend to renew this year.
Mahesh S
Mahesh S
19. February, 2023.
I have availed Holistic investment service for last 1yr against my early retirement decision. they provided me comprehensive detailed report how to move ahead with my existing resources. moreover, they are available to me whenever i have any doubt.. highly recommend others to avail their service
Google rating score: 4.5 of 5,
based on 104 reviews

Google Reviews

Lingesh MMG
Lingesh MMG
20. September, 2023.
Na eppo tha financial goal la enna therunju kitta..enaku full support panna thuku thank you..🥰 friendly nalla pesuninga...
Ravi L
Ravi L
15. August, 2023.
Very knowledgeable and professional team, guided me with the precise financial solutions and timely suggestions.
Hardik Dave
Hardik Dave
5. July, 2023.
Holistic Investment is really nice and trust worthy financial planner. They plan things in realistic manner and also consider future dimensions of items also. They are always available for small or big queries, and also share knowledge and help you become more financial literate, and take right decisions in all financial matters.
Dr. Padmakar Wagh
Dr. Padmakar Wagh
27. June, 2023.
Mr Ramalingam who is the Director of Holistic investments has a excellent financial planning knowledge, the entire Holistic team has been very helpful in my financial planning journey and execution. This is my third year of financial planning with Holistic investments and so far I am satisfied with the progress I have made.
Binamra Dash
Binamra Dash
13. June, 2023.
Very knowledgeable team. Guided me properly with my concerns.
Murugan Bala
Murugan Bala
16. May, 2023.
I have been investing through Holistic for the past 4 years and my experience with them have been really good. The team of Rajan and Ramalingam doing excellent services in meeting my needs through proper guidance on investment options customized. Theya re always available on any specific needs time to time.I would recommend their services to my friends and colleagues too.
Neeraja R K
Neeraja R K
15. May, 2023.
Working with holistic investment planners was a really wonderful experience for me. For me the entire team had been very supportive in all ways. Their working strategy is well planned and methodical. They always keep me informed and updated about my investments, so that i can take informed decisions. The team first helps us understand the basics of investments, then they collect data, work with the data and then provide investments solutions according to our goals which i find it the best. Good luck to the entire team.
deepika kulkarni
deepika kulkarni
21. April, 2023.
We have availed holistic service from last couple of years and are very happy with our decision. Their systematic approach has helped us plan our finances and meet our goals. They provide very comprehensive and detail plan and resource management every 6 months which ensures we are on right track to achieve our goals. Rajan and Ramalingam from holistic are always there to help us with our queries. They have also accommodated any changes to our goals or resources mid year in a professional manner.
Ashook Panneerselvam
Ashook Panneerselvam
21. March, 2023.
For the past year, I have been interacting with Holistic Investment. I frequently read Nanayam Vikatan, which is a publication owned by the Vikatan family, and I was impressed by their financial advice. My brother also suggested holistic investing, and he also got excellent financial advice. Holistic Investment follows a methodical approach that I really liked because they first fully understand our financial situation "As Is," which includes "Assets" and "Liabilities," as well as our short-, mid-, and long-term goals, on the basis of which they provide a detailed plan on how to achieve our goals for which they are recommending various investment options. Even in the investment advice, why do they suggest particular mutual funds and what is the justification behind it, which adds transparency to the client. One essential factor is that they are always available. Even if I needed to make some urgent financial decisions, they were very helpful and kind to answer my questions via phone calls, WhatsApp messages, and emails. I was very happy with their service. Periodic reviews are also crucial, even though I have forgotten that they occur once every three months, and I also intend to renew this year.
Mahesh S
Mahesh S
19. February, 2023.
I have availed Holistic investment service for last 1yr against my early retirement decision. they provided me comprehensive detailed report how to move ahead with my existing resources. moreover, they are available to me whenever i have any doubt.. highly recommend others to avail their service
Google rating score: 4.5 of 5,
based on 104 reviews

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