Risk mitigation is an important aspect of investing. Every portfolio should have it innately built in. The composition of the portfolio should factor in the risks and provide for investment actions when risks arise.
Not owning too much of an individual stock or fund is one way of mitigating risk. Keeping cash to deploy in every correction and raising cash levels when valuations are not giving comfort is another. Investing in undervalued parts of the market is also a way of mitigating risk. Selling richly valued investments which already discount distant earnings is yet another effective way of mitigating risk.
Staggering investments or systematically deploying money instead of plugging lumpsums also effectively addresses the problem. Essentially, keeping close tabs on valuations and evaluating the investment worthiness of stocks will help us take effective actions that mitigate risk. Needless to say, valuations hold the key.
The coming weeks will see companies which aren’t doing too well release their quarterly performance. We need to align their performance to valuations, measure accurately and assess the exact need for risk mitigation.
“One way to mitigate our risk is to invest in companies with understandable business models.” – Andrew Tan