Investment risk: 3 techniques to better control it

By placing your money and investing in the markets, you deliberately expose yourself to the risk of enjoying a positive return when they go up. But by taking this exposure, you simultaneously assume the risk of seeing the value of your investment decline, should the markets begin to decline. And if the level of risk you take exceeds your comfort zone, then it can lead you to make the wrong investment decisions in the short term, and harm the performance of your investments in the medium and long term, thus reducing your chances. to achieve your financial goals.

Managing the risk inherent in your investments is an essential step for any saver wishing to build medium or long-term savings in a consistent manner. Implementing a risk management strategy is crucial for the success of your investments over time. In a very practical way, we therefore describe some common scenarios that can expose your investments to unnecessary risks, and some simple principles that can allow you to better identify, measure and manage these risks.

Diversify your investments to limit concentration risk

Let’s imagine that you have used a large part of your savings to buy shares of a certain listed company. If an unexpected event causes the share price of this company to drop sharply and suddenly, you are at risk of losing a significant portion of this investment and therefore of your savings, thus putting your financial health at risk. This is called concentration risk. This corresponds to the old adage not to “put all your eggs in one basket”. In this situation, you risk losing a significant proportion of your money due to a single event.

This concentration risk can be easily reduced by diversifying your investments. Diversifying your investment portfolio allows you to continue to aim for the high returns associated with risky investments — stocks, for example — while minimizing the negative impacts that an investment in a single asset can have.

Let’s take an example. A portfolio that contains a selection of stocks, bonds and a few commodities (eg gold or silver) will generate profits through the “risky” part of the portfolio — the stocks. The risk generated by this asset class will be mitigated by less volatile and more protective assets such as bonds and gold, which minimize the likelihood of a sharp drop in the event of market corrections. In addition, a portfolio that is invested in multiple continents benefits from geographic diversification. This allows its owner to benefit from high returns from high-growth economies, while reducing the risk of an event, such as a political reversal or a natural disaster.

Diversification can take many forms. It can take place within the bond part of your portfolio (by sector and geographically) or you can even go so far as to build several portfolios with different allocations by asset class according to a time horizon objective . For example, you can build a proportionally riskier portfolio over a very long time horizon (preparation for retirement). This riskier portfolio may suffer sharp short-term declines in a financial crisis, but is designed to generate higher returns over the long term.

Avoid the risk of market timing by programmed buying

Investors who try to buy low and sell high often make decisions that are driven by emotion, and not based on sound investment and risk management principles.

For example, savers who fear missing the next rise buy too much when the markets are in a growth phase and thus expose themselves to more risk than they should take. And when the markets turn around, which inevitably happens, they can no longer bear this risk and start to sell their investments, often at a loss.

Rather than investing all of your savings at once, deploying your money on a regular basis helps you avoid the heavy losses suffered by those trying to time the market. The Anglo-Saxons call this programmatic approach the “D ollar-Cost Averaging(DCA)”, which gives you an average purchase cost over time. By committing to investing a constant amount on a regular basis, regardless of whether the market moves up or down, this approach distributes your risk across multiple entry points over time. Contrary to what your instincts might suggest, there is no bad time to invest, as long as you don’t invest all of your savings at the same time. With this method, you will buy more units when market prices are lower and fewer units when prices are higher, which is equivalent to averaging your cost of purchase over time.

Avoid opportunity cost by staying invested

Historically, equity markets have always risen over the long term. The most logical and profitable action you can take for your savings is therefore to adhere to your long-term financial plan and therefore stay invested. Thus, you give the opportunity to your investments to capitalize (i.e. to grow the gains already made on your initial capital, in order to generate gains on your earnings and so on) and therefore to maximize your return. in time.

Maximize the chances of making your savings work for you

All investments involve risk. But many techniques exist to manage it, in order to optimize the return you can expect to receive for a given level of risk. Among the most basic principles, diversification, planned purchases and simply staying invested over time are risk management approaches that allow you to considerably increase your chances of generating attractive returns on your investments in the medium and long term.