10 Tips in Managing Investment Risks

Some people like to pretend they know how to invest. Some people don't realize they could be just lucky for now and might suffer losses in the future. The most important thing about investing is not profits. Huh? Did I say that? Yep! Managing risk is the most important key to success. Actually, I apply that to every decision that I make in life. What this means is recognizing when to enter and exit a stock or investment of any kind. You should always evaluate your risk to your reward. I pride myself on risk management. The reason I do is because I graduated from "Hard Knocks University"; which means learning from making mistakes. Fortunately, I have Capricorn sense, and it doesn't take more than once for me to learn from these mistakes. If you lower your risk, you lower the chance of losing money. Profits will follow later, but you save your principle investment by managing your risk. This might be especially important in 2008 because we have not seen this worse of a January start for the stock market in the last fifty years or so. Furthermore, this could be indicative of a tough 2008.

Here are some tips that you should ask yourself before putting your hard earned money or time to work:

1. Develop a Discipline. You need to have a plan and tweak it along the way. When a plan works, you stick with it. When it doesn't you go back to the drawing board.

2. Know when to Change your plan. You need to understand how to manage a change when things just don't go your way. Keep those emotions out of it. Stick with your facts.

3. Learn from your mistakes. If it isn't working the first time, try something else. Why go back to what wasn't working. You must make sure you aren't letting your ego get in the way. It's hard to admit you made a mistake. However, it's harder to accept a loss.

4. Educate yourself. Learning is an ongoing element. For example; let's say you were picking stocks last year that just didn't do well. Each stock belongs to a specific industry. If the industry did well and you didn't, look to see if there is a better way to manage that risk. Instead of buying an individual stock you can purchase shares in an ETF for that industry. An ETF is a basket of stocks within the industry. Click "here" for more information on ETFs. It's hard to pick the right stock versus picking the right industry.

5. Knowledge is power, however the more information you have does not mean you have knowledge. It's one thing to absorb a lot of knowledge. And yet, if you don't apply this knowledge in a useful way, it is worthless.

6. It is fine to be optimistic, however make sure you are realistic. If you are losing money, you can't keep having a Pollyanna attitude when the facts are telling you to change directions.

7. Know your downside to the upside reward.

8. Know your benchmark. If you know what the other stocks are doing in that industry; then you know how you are doing.

9. Know your goals. Many people buy stocks without having a definite goal. This goes back to having a plan. However, there is a difference between a plan and a goal. The plan will get you to your goal.

10. Know when to cut your losses and move on. Don't be buying more of the same losing stock trying to average down your money. Find stronger stocks that have weathered the storm better. It's called "relative strength". Click "here" for an explanation of what relative strength means. You can find examples there too.

When things look extremely complicated in the stock market and you just don't know what to do, sit down with a pad and pen and weigh your positives and negatives in your portfolio by going through each stock you have chosen. Long term investing is becoming more complicated and sometimes you just need to make sure things are still on target. No one knows for sure where the market will go. To become successful, you have to repeat these steps periodically. The best you can do is to increase the odds in your favor by managing your risk.