Investing for Beginners .EU, investing Your success in investing will depend in part on your character and guts, and in part on your ability to realize at the height of the ebullience and the depth of despair alike that this too shall pass.
John Bogle

Investment Risk Management


There are several main methods of investment risk management: 


  • Diversification. Diversification is the easiest and most of the times the cheapest way to reduce risk level of the investment portfolio. However, the power of diversification is limited to a market risk. The best you can do is to widen your investment market and use more asset classes. 
  • Hedging. Hedging is usage of derivative instruments as futures, forward, options and swaps to control possible risks. However, such hedging has additional costs: whether you have to surrender your potential profits or pay additional costs. Hedging mostly is used by financial institutions for which the stability of investments is the main priority.
  • Fundamental risk management. Fundamental risk management is similar to diversification but investments must be spread between anti correlating assets. This means an investor have to use investments that are moving in different directions under some market conditions. A good example of it might be transportation company’s shares and oil extraction company’s shares. If oil prices are growing it makes suffer transportation company’s results, but oil company under such circumstances will do better.



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