How different investors manage risk and approach the market.


Different investors manage their portfolio risk differently , as they hold different objectives, expectations and reservations about the market. There are different levels of risk in which assets can be classified, low risk, moderate risk and high risk assets. Investors can be categorised along the same metrics, and each category manages their risk differently.

Low risk investors:

Low risk investors are deeply conservative and avoid an assets or securities that exceed there threshold of low risk. The level of risk is often correlated with the amount of returns that specific asset can be expected to produce. Therefore a low risk asset, will often produce or offer respectably low returns, so the question comes how do low -risk investors make money from the market? They make money through volume. 

Here is a funny but true story, many hedge funds are ecstatic if they earn a return of 1%to 3%. For most people this does not seem like a very exciting return. Imagine if you invested R100 000 in a year and only received a 1% return , you would not be too impressed. On the other hand for a hedge fund manager who manages billions of dollars for their clients that may be insurance companies, pension funds or wealthy individuals 1% to 3% translates into millions of profit. Millions in profits is much better than any losses, which will cost the hedged fund millions in direct and indirect losses.

So the name of the game for low-risk investors is volume. Low risk investors often invest high volumes of there money into what they believe are low-risk and safe investments. The mistake that a lot of new investors make , is assuming that in order to build a sizeable investment portfolio they need to commit all their savings into their investments at one time, and this is not the case. It is better and more advisable to build an investment portfolio through monthly deposits , than through lump sum amounts, if you wish to learn more about this follow the link ().

Moderate risk investors:

Moderate risk investors are in the middle between the high risk and low risk investors. They opt between choosing moderate risk rated investment options , or they can build a portfolio that is inclusive of both low -risk investments assets, moderate and also high risk investment, as a means of diversification to offset and balance the different levels of risk in the portfolio. 

Therefore the crux for a moderate risks investors is to understand the composition of their portfolio particularly against the  calibrations of risk. For example if they have one high risk asset , and balance this risk by investing in heavily low risk assets. They can opt to have a lot of moderate risk assets. Nevertheless the approach of most moderate risk investors is often to leverage of the principals of diversification to build their investment portfolio. If you want to learn more about diversification follow the link().

High risk investors:

Ideally the high risk investor is not  the beginner investors. High risk assets, may seem tempting to beginners because they often offer the highest returns. However, they can easily go bust and leave the investor with several costly losses. You may think that if you invest in high risk assets, you can reduce your risk by minimising the amount of money you invest in that category of assets? This is not a good idea. If you are not confident in your investment and have reservations you should not invest in that financial product.

In light of this the high risk investor or at least a successful high risk investor is very well researched about the high risk investment(s) they are going to invest in. It is also for this reason high risk investors have to focus on a few (even one or two) assets , so that they can have a great understanding of the product and make decisions accordingly.High risk assets unfortunately have a tendency of attracting uninformed speculators, who literally throw their money at high risk products. Bitcoin, must I say anymore?

High risk investors have no other friends than due diligence and research. If you do not have the financial analysis that supports investing in the respective product  you will not win. Warren Buffet famously used to invest in underpriced companies , that were considered finished and about to be bankrupt, in order to do this successfully he would pour hours into reading the annual reports of these companies and often know their numbers better than the CEO of the companies. This just further confirms my argument that high-risk investing is an acquired taste for people willing to do the work, and even at times you can do the work and fail miserably. A good case of this would be Bill Ackmen , a well known hedge fund manager who failed an lost billions on his short of Herbalife, if you want to learn more about this you can follow the link , and perhaps even consider watching the documentary, Betting on Zero.

There are different approaches to the market , and nothing is set in stone, you build an approach that suits your personal, preferences and goals , and ensure that you always manage the risk in that portfolio.


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