There are thousands of varied stocks that one may choose to purchase. All of them would essentially require the investor to consider the same key tradeoff: risk versus return. As per Kavan Choksi Professional Investor, in general, the greater an investment’s potential returns, the more likely it could decline precipitously in value. Hence, when trying to explore ways to maximize their portfolio’s return, investors need to understand what impact a big decline in investments would have on them. After all, hidden risks can be pretty detrimental to wealth creation.
Kavan Choksi Professional Investor provides an insight into assessing risk in an investment portfolio
As an investor, one needs to examine how a dip in their portfolio impacts their finances, as well as how would they react emotionally to losing money. A dip in an investor portfolio would materially impact the rest of their financial picture, and hence understanding their risk capacity is extremely important for all investors. If an investor is years away from their long term goal, such as retirement, short term risks and dips may not be a big deal as their investments would have decades to recover. However, if their goal is in the near future, taking on a huge risk can potentially derail their financial future.
Proper risk assessment makes sure that the investment strategy followed by an investor aligns with their financial objectives. No matter whether their goal is retirement planning, buying a home, or funding a child’s education, understanding risk is crucial to achieving those goals.
The ability to stick to the financial plan in the face of investment losses is known as risk tolerance. It is normal to get anxious when taking out major risk and facing losses. However, if an investor lets their anxiousness drive them to rash financial decisions, they could potentially do more harm to their finances. A carefully assessed and well managed portfolio would provide investors with a much needed peace of mind. The knowledge that their investments are aligned with their risk tolerance can help investors to reduce stress and anxiety during market turbulence.
According to Kavan Choksi Professional Investor, assessing risk in an investment portfolio is largely about preserving capital at its core. When a person invests their hard earned money in the market, they would want to keep these funds protected. Capital preservation is especially vital for retirees or those with fixed financial obligations, as losses can have a devastating impact on their financial well-being. Gaining a good understanding of the distinctive risks associated with varied investment options is essentially an important step in safeguarding capital. Varied stocks may come with diverse degrees of risk. By assessing these risks, investors may take steps to allocate their capital in a way that aligns with their tolerance for potential losses.
Investors should ideally try to evaluate their risk tolerance and investment horizon in order to strike the right balance between risk and return. This balance would be unique to each individual or and may even change over time as circumstances evolve. Risk assessment allows investors to make informed decisions that match their current financial situation and long term financial goals.