Managing risks and volatility

Investing in the share market carries with it a level of inherent risk and volatility. Managing this risk is an integral part of an investment strategy. In this article, we will help you to understand some ways to mitigate common risks and respond to market events.

Diversification

Diversification is one of the most common forms of risk management. By varying your portfolio across different asset classes and investments, you can help limit the impact of negative events that may affect an individual asset class or investment type.

For example, instead of investing solely into the share market you may spread parts of your investment across other asset classes, such as property and bonds. This may minimise the impact a dip in the share market may have upon your entire portfolio.
 

Sector Diversification

Whilst you can diversify across different asset classes you are also able to diversify across different sectors within the same asset class. For example, on the Australian Securities Exchange there are 11 different sectors. These 11 sectors are based upon the GICS (Global Industry Classification Standard) and are listed below:

1. Telecommunications
2. Consumer Discretionary
3. Consumer Staples
4. Healthcare
5. Financials
6. Information Technology
7. Telecommunication Services
8. Utilities
9. Real Estate
10. Energy
11. Materials
     

Achieving diversification

Below is a list of factors to consider when seeking to successfully diversify your portfolio

• Avoid single asset or single asset class/sector risk
• Implement asset allocation targets into your investment strategy
• Regularly monitor your investments to ensure they are in line with your target asset allocation
• Create a habit of regularly revisiting your target asset allocationto confirm whether it continues to suit your financial objectives and risk tolerance.
   

Using alerts

Alerts are a useful tool that will notify you when a specific event occurs. Brokers can usually help you in setting up alerts for the following things:

• Ex-dividend alerts: receive an alert once a stock’s ex-dividend date is near
• Price alerts: once a stock price reaches a certain price you will be alerted
• Volume alerts: when the trading volume reaches a certain point
• Announcement alerts: when companies release market related announcements
   

Stop-loss Orders

A stop-loss order is a sell order that is dependent upon shares reaching a certain price. This price point is known as the trigger price. Once the trigger price is surpassed then the sell order, which may be an ‘at limit’ or ‘at market’ order, is placed on the market.

Investor should consider that in the event of a market crash or rapid decline in share prices stop-loss orders do not guarantee a trade execution. Your trade may be partially executed or fail to execute during these circumstances.