How to reduce Stock Market Risk & Investment Risk? – Stock Market for Beginners - YouTube

Friends, we are going to discuss a very important topic in this video

That is stock market risk or investment risk

We do different types of investments

We invest in the stock market, real estate, gold, bonds, cryptos, startups

Each type of investment has a different risk

And we are always chasing more and more returns

But a very neglected area is risk management

We are going to discuss in this video that how can we minimize the risk in investments

So we'll talk about 7 steps through which we can minimize the risk

Video is going to be important, stay tuned!

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Friends, the first step is to understand your risk profile

Like the people who are young and are in their 20s are unmarried, they don't have kids

They don't have much liabilities on them and the earnings are decent

In such cases, they can bear more risk

But if there's someone in their 40s or 50s

They are married, have kids, maybe there are some EMI's for house or car

So their risk appetite would be less

So we have to first analyse our risk-taking capacity

There may be cases in which someone is in their 30s unmarried and doesn't have kids

but the earnings are even higher

In such cases, the risk-taking potential becomes higher

And some people already have good earnings, so their risk-taking capability increases

So firstly, we need to understand how much is our risk-taking appetite

The second step is Stocks Diversification

Whenever we invest in stocks, we should not invest in only one stock

We should invest in multiple stocks

In fact in the 1950s, Harry Markowitz proposed a Modern Portfolio Theory for which he got a noble price

When we invest in stocks, each stock has its individual risk

which we count with the help of volatility

That means when there is a high momentum in a stock, we say the risk is high in that

So we count volatility in mathematical terms

So Harry Markowitz said that the risk of individual stocks reduces if we invest in 10 different stocks simultaneously

Hence the total risk of the 10 individual stocks will be less if we combine all the individual risks

So it is mathematically proven that when we diversify our investments, the risk reduces

There are 2 types of risks

1. Systematic risk 2. Unsystematic risk

Systematic risk is due to the macroeconomic factors

For example, no one could have predicted the Russia-Ukraine crisis

But the supply chain is distorted in the whole world due to that

and it is impacting many industries

So we definitely cannot control these types of risks but

we can definitely manage the unsystematic stock related risk

And it can be managed properly when we do diversification

So how should we do diversification?

Ideally speaking, we should invest in 15-20 stocks

But if we're starting in the stock market, then also we should not start with only 1 stock

We should invest in at least 8-10 stocks

And we can slowly increase the size of our portfolio

In fact, I did a detailed video on how many stocks should you keep in your portfolio. So you can watch that

So this was about stock diversification

On 3rd, we have Asset Allocation

We should not invest all our money in only stocks

because there are ups and downs in the equity market as well

So we need to protect ourselves from that

If I take the example of Harry Markowitz, he invested 50% of his money in bonds and 50% in stocks

So whenever there is a downward cycle in the stock market, the bond market would have protected him

In the same way, we can invest our money in different assets

We can invest in stocks, real estate, definitely in gold

For example, stocks and gold are always inversely proportional

Whenever the stock market is down, gold performs extremely well

So in a way, you can hedge

With this, we should keep some portion in cash as well

However, I'll talk about this in more detail in the upcoming point

With this, many people invest in high-risk investments like in cryptocurrencies, NFTs, or in early-stage startups

So it is very important to understand that we should not invest a high amount from our portfolio in high-risk investments

We should keep less portion for high-risk investments

and if it performed well, you'll get very good returns

But on the other side, if those investments fail, our capital may get eroded if we've invested a high amount

So we should review our asset allocation every year

If in any year we see a good opportunity to invest in real estate, we can increase some portion there

If in any year we predict a bull run in the upcoming days then we can increase our investment in stocks

But it is very important to diversify all the assets

Whether the market goes up or down, we should keep allocation in all the assets

This brings in our 4th point

As I discussed earlier, we should maintain a cash position as well

That we'll call as maintaining the liquidity

We should keep some money in cash or FD. But why should we?

Definitely, one reason is that we should store some money for emergencies

We've discussed many times to maintain an emergency fund worth 6 months' salary which should not be touched

But apart from this, there is one more reason for maintaining cash

Many times there is a sale in the stocks

There may be any crisis like a covid crisis, the Russia-Ukraine crisis

It can be a subprime crisis or any other crisis

At these times, there is a huge fall in the stocks

If you won't hold cash at these times, you will not be able to buy the stocks

As Indians, we definitely prefer discounts

So when there will be a discount on the stocks but you won't have money, you'll regret

That's why we should maintain liquidity

5th point is Long-Term Investing

When we talk about long term investing, our risk is automatically reduced to a large extent

There may be ups and downs in the stock market but the downtime is not going to forever

The markets will rise after 6 months or 1-1.5 years and rebounds very strongly

So when we invest in long term

Let's say we bought some stocks on premium today

If we stay patient and don't sell it

Whenever a stock falls by 10-15%, we lose our patience level

So if we're holding a stock for 5-10 years, the risk is already reduced much

In fact, we saw mathematically that how well compounding works in long term

I discussed in many of my videos that if you invest Rs 10,000 per month for 35-40 years

If you compound it by 15%, i.e you get 15% yearly returns on it

Then your total portfolio becomes more than Rs 15 Cr

So even if we include inflation, we get a huge corpus at the end

So the risk is reduced to a large extent from long term investing

On 6th, we have Due Diligence

Due diligence is the analysis before investing in any stock

And you should not blindly purchase any stock on any stock broker's tip

I also made these mistakes

Investing in a stock mentioned in any news item. I also did such mistakes

But if you got a recommendation for a company, you should do your research about it and do some basic analysis

Do learn basic ratio analysis and basic stock analysis

In fact, I would like to quote an example over here

Shark tank is a very popular show in India nowadays

There you might have seen that the sharks make their decision within 5 minutes

But they do their analysis and understand the business

They understand that whether this business or industry can grow in future

What types of gross margins the company is making

What can be their future and what is the valuation they are asking for

So we should definitely be aware of this basic analysis

and after that, our risk gets reduced

7th point is to Watch Your Investments

Many people say that once you've invested, you're getting a passive income in a way

I believe there is nothing like 100% passive income

It's important to monitor your investments

For example, people say once you've invested in real estate, you'll receive rent continuously

But if your property is vacant, you'll not receive any rent and hence, it is important to manage it

If you have a plot, it is important to manage it

SImilarly in stocks, I can give examples of many stocks that were the darling of investors at a time

For example, Unitech gave huge returns a long time back

Today where is that company? It is almost dead

Hindustan Motors which used to make ambassador cars was an iconic brand

Where is that company today? It is gone bankrupt

There are many examples like these

Which companies do we look for?

We actually look for the survivor companies

So there is a survivorship bias

We see how many crorepatis did HDFC Bank made

We see how many crorepatis did Eicher Motors made

But we don't see how many casualties were there for 1 HDFC, i.e many banks went bankrupt in the early 90s

So I think we should monitor our investments

And I am not saying to concentrate on short term volatility

Let's say the Russia-Ukraine crisis is going on. Many stocks may fall down and the overall market may also fall down

But we should definitely monitor the long term issues in any company

If there is a problem going on in any industry, we should see whether it is a long term or a short term problem

And similarly for a company, we have to check whether it is a long term or a short term problem

For example, nowadays we have EVs (Electric Vehicles)

So if a company says that they'll keep manufacturing oil-based engines, then maybe its downfall start

But on the other hand, if the automakers start concentrating on EVs

The upcoming time may be a golden time for them

So these were the 7 important points with which you can reduce the risk to a large extent in any investment

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I am sure that this will add value to them

Many people invest and risk is a very important factor that we should consider while doing any investment

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Till then keep learning, keep earning, and stay happy as always.