Risk management? Sometimes patience is the best idea! - November 01, 2015

Risk management? Sometimes patience is the best idea!

When we are investing money there is always a risk involved, but for most of us the size of that risk really matters. If we are good at risk management our investments can have (higher) returns, but if we are not, we can lose our hard earned money. The risks are depending on what kind of investment we chose and how patient we are.

Basically common men can choose four different kind of investment:

  • Stock exchange
  • Forex trading
  • Real estate
  • Investment portfolio

As market changes (sometimes rather rapidly) all investments can hold some risk. But as changes on stock exchange are extraordinarily fast, choosing stock exchange trading can do a lot of damage to our investment. Most people do not understand exactly the changes of a stock exchange, so their buying and selling is not driven by a well thought out business strategy but mostly emotional. Plus, if there is a price fall with one stock, people tend to sell their stocks, even at lower prices than they bought it, so they are losing money. (Also, this emotionally driven trading was one of the reasons of the Chinese stock market crash.)

In stock exchange, one of the greatest investor’s, Warren Buffet’s main strategy is to buy the instruments of companies with strong fundamentals. What’s more, he usually buys stocks during crisis or correction, and hold on to those instruments for 5-10 years. So patience and cold thinking, again is a good idea. Not to say that a good stock can even pay dividens. However, stock exchange without strategy and proper diversification is more of a Black Jack game in Las Vegas than real investment.

There is another possibility for trading: Forex, or foreign exchange. In this case not stocks but currencies are traded, and for most time that kind of investing is even more dangerous than simple stock exchange. The same rules apply to this as to stock exchange: the markets are changing fast and most people don’t have a thought out strategy. (This year Rouble, Yuan and other currencies lost their values.) What’s making it even more risky is that Forex usually based on leverage and that increases risks a lot. No wonder, a lot of people who try Forex trading are losing their money instead of earning profits.

Many believe that real estate is also a great investment, but making money this way isn’t that easy either. The real estate market is up and down most of the time, and a house or flat needs reinvestment regularly. A real estate owner always has to keep in mind amortisation and the price of renovations. But there is one really huge drawback of real estate: liquidity. Selling a real estate can be a really long process, and if we need our money fast, we can face huge losses. That is even more true if the market is not strong at the time.

That leads us to the investment portfolio. A well thought out portfolio usually consists of several instruments, picked by professionals who understand the markets and calculating risks and returns all the time. There is one more thing they can do better, and that is recalibrating the portfolio if needed. Professionals also have the most crucial skill that is needed in investment: patience. As markets are a subject to change all the time, they are down sometimes. Those are the times when we have to wait for the turnaround. This is the most likely way we will not lose money.

This is also true with investment portfolios. Most “packages” are made for 5-10 years: that is the time they are making their greatest profits. So if we have a trustworthy investment partner, we should wait, even if we experience a mediocre year instead of taking out our money with losses.

Altogether, for most people without serious knowledge of the market the best way to use money is patience combined with a properly set up and professionally supervised portfolio. This way we really can talk about investment instead of gambling.

Disclaimer: Innovative Securities offers Profit Max which has a highly diversified, professionally assembled portfolio. In the last 5 years Profit Max performed better than the S&P500 Index.