A balanced portfolio is every investor’s fantasy. But how can you build one in Nigeria and what does risk management have to do with it?
Risk management in investing is the identification, assessment and prioritisation of risks associated with investment activities. The main goal is to mitigate potential losses while maximising returns.
We’ve already discussed the types of investment risks in a previous article, so this post will focus on strategies for managing them in your journey to financial freedom. Ready? Let’s begin!
How does risk management work in investing?
Risk management in investing encompasses various elements — including asset volatility, market trends and geopolitical factors that may impact financial markets. It also impacts different classes of investments — from stocks and bonds to commodities and high-yield savings accounts (HYSAs like Flex Naira on PiggyVest allow you to earn up to 14% per annum).
However, robust risk management addresses both the external forces that can affect your investments and your emotional responses to market movements.
How to manage risk in investing
Investing inherently involves uncertainty. Therefore, using a structured approach to manage risks can provide a safety net for your investments.
You can manage risk in investing using these strategies:
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- Try diversification. Spreading investments across various asset classes (like stocks, bonds and real estate) can help reduce risk. The idea is that if one investment performs poorly, others may perform better — balancing overall returns.
- Explore asset allocation. This entails dividing your investment portfolio among different asset categories. Proper allocation based on your risk tolerance and investment goals can inherently limit exposure to any single asset’s risk.
- Set investment goals. Having clear, defined goals helps in determining your risk tolerance. Short-term goals may require a more conservative approach, while long-term objectives might allow for higher risk exposure.
- Use stop-loss orders. Setting stop-loss orders can automate selling an asset when it reaches a particular price, thereby limiting potential losses.
However, you don’t have to shoulder the responsibilities alone. You can also manage investment risks by consulting a financial advisor (especially if you’re uncertain about your investment choices).
These professionals can provide tailored advice based on your situation — further enhancing your risk management strategy. Remember: a good advisor will not only help you navigate the complexities of the market but also assist in creating a robust investment plan that aligns with your personal values and financial aspirations.
Common risk management mistakes to avoid when investing
It is important to recognise and avoid common pitfalls if you want to get better at managing risk in investment. Many beginners (and even some pros) fall into several traps that can jeopardise their investment success.
Some common mistakes to avoid in risk management when investing include:
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- Overreacting to market fluctuations. Emotional responses can lead to impulsive decisions, such as panic selling during market dips. You must maintain a long-term perspective.
- Insufficient diversification. Concentrating investments in a few stocks or sectors increases exposure to risks. Ensure your portfolio is spread across a variety of asset classes to cushion against downturns.
- Chasing past performance. Investing based solely on returns you have made from your previous investments without conducting thorough research can result in poor decisions. Past performance does not guarantee future results.
- Neglecting risk assessment. Failing to regularly assess and adjust your investment strategy based on changing market conditions can leave your portfolio vulnerable. Regular reviews are essential for successful risk management.
By being aware of these mistakes and actively working to avoid them, you can significantly enhance your investment journey and overall financial health as an investor.
How to create a balanced investment portfolio
Creating a balanced investment portfolio requires careful planning and consideration of various factors. It’s not just about understanding and managing risks — you must consider the future.
Here’s a handy guide for creating a balanced investment portfolio:
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- Set your investment goals. Clearly defining your objectives — whether they are capital growth, income generation or capital preservation — will guide your investment decisions.
- Determine your risk tolerance. Understanding your personal risk tolerance is crucial. Your tolerance is determined by age, financial situation and investment goals. Paying attention to these factors will influence your ability to withstand market volatility.
- Select appropriate asset classes. Choose a combination of stocks, bonds and alternative investments that align with your goals and risk appetite. A mix of growth and income-generating options can provide stability.
- Regularly rebalance your portfolio. Over time, some investments may grow disproportionately — leading to a portfolio that no longer reflects your desired risk exposure. Regular rebalancing ensures alignment with your investment strategy.
Remember to stay disciplined and stick to your strategy. While this requires patience (particularly during market turbulence when emotions often run high), a well-constructed portfolio can be the reason you break into generational wealth.
Summary
Embarking on the journey of investing can be both exciting and intimidating, especially for beginners. A fundamental aspect that every new investor should grasp is risk management. After all, understanding how to balance risk can not only safeguard investments but also enhance potential returns.
Now, it’s time for you to start investing! With only ₦5,000, you can access various low-risk, pre-vetted opportunities on Investify and earn up to 35% yearly returns on your capital.
Sounds good? Download PiggyVest to get started!
The articles on the PiggyVest Blog are developed by seasoned writers who use original sources like authoritative websites, news articles and academic journals to perform in-depth research. An experienced editor fact-checks every piece before it is published to ensure you are always reading accurate, up-to-date and balanced content.
