How do you manage Investment Risk?

Hello, I'm Chris McAlpin of Sound Financial Strategies Group, serving as your Chief Experience Officer. Today, we're tackling a critical aspect of investing: risk management. Understanding and managing risk is fundamental, whether you're a seasoned high-risk taker, a beginner eager to learn, or transitioning into retirement.

Understanding Risk

Firstly, it's crucial to grasp what we mean by risk. Traditionally, risk is viewed as the likelihood of losing money. However, we see risk differently at Sound Financial—it's about the probability of not achieving your financial goals. This perspective shifts the focus toward comprehensive financial planning and disciplined investment strategies, empowering you to take control.

Strategies to Manage Investment Risk

Managing risk is essential across all investment stages. Here are three key strategies to help you navigate the uncertainties of investing:

1. Diversification: The most classic and effective strategy isn't just about spreading your investments across asset classes like stocks, bonds, or commodities. It's about ensuring these classes are varied enough, like having a mix of US and international stocks or government and corporate bonds. Remember, diversification isn't just a strategy; it's a philosophy, one that's responsible for the majority of your portfolio's returns.

2. Stop-Loss Orders: A more tactical approach involves setting stop-loss orders on your investments. This means placing an automatic sell order at a predefined price or percentage loss. While it requires monitoring, it's a proactive way to limit potential losses, ensuring you're not caught off guard by market downturns.

3. Hedging: This is about protecting one investment by making another. For example, if you've invested in a company like Apple and are concerned about short-term risks, you might hedge by short-selling S&P 500 futures, offsetting potential losses. Hedging is sophisticated and should be approached cautiously, but it can be a powerful tool in risk management.

The Essence of Risk Management

Warren Buffet's golden rules of investing — not losing money and always remembering that rule — highlight the core of risk management. Emotional decisions can derail even the most astute investment strategies. Consistent risk management is not just a tactic but a foundational principle guiding successful investing.

As we delve into the intricacies of risk management, remember that the goal is not just to grow wealth but to do so in a manner that aligns with your financial objectives and risk tolerance. Whether through diversification, stop-loss orders, or hedging, the key is to remain disciplined, informed, and proactive in your approach.

Thank you for joining me on this journey through risk management. At Sound Financial Strategies Group, we're committed to guiding you through the complexities of investing, ensuring you can make decisions that resonate with your long-term goals. Stay tuned for more insights and strategies to enhance your financial well-being.