InvestorQ : How important is managing risk when it comes to long term investing? I guess risk managing is only important for traders?
shrinidhi Rajan made post

How important is managing risk when it comes to long term investing? I guess risk managing is only important for traders?

Answer
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TSH answered.
1 year ago


When you deal with money there is risk and when there is risk then it has to be managed. Risk is a return destroyer and hence needs to be managed smartly. In his landmark book, “Against the Gods”, Bernstein had rightly pointed that the reason financial markets developed in the 20th century is due to a better understanding of risk; both academically and practically. There are 2 sides to the investment game viz. return and risk. If you are earning good returns on your portfolio but the risk of your portfolio is too high, you have to change course. Your portfolio is just too vulnerable to external shocks. Always evaluate your portfolio returns on a risk-adjusted basis and ensure that you are constantly evaluating whether there are any disasters waiting to happen in your portfolio. Keep asking the following questions at all points of time. Are there are companies in your portfolio which are highly leveraged? Are there companies whose business models are likely to be hit by disruptions? Are there companies in your portfolio which are commodity based and hence dependent on the super cycle? Are there companies that are losing out to competition both in terms of market share and profit margins? Nokia is a case in point globally. Each of these points is a risk highlighter and must be acted upon immediately. What we have given is not a framework for investing but an understanding of the basic philosophies that will help you get more value from your long term investment and, of course, generate wealth in the long term! After all, that is the core purpose of investing, right?