How to manage your risk when investing

Whether it be switching jobs, travelling overseas, climbing a mountain or investing – almost everything in life comes with an element of risk. Luckily, the power to understand and manage that risk lies with a pretty savvy individual…you!

What are the risks?

Whether you invest in an individual business or a broader sharemarket index like the S&P/ASX 200, the price of shares can rise and fall. So it’s only natural that you may see your investments fluctuate.

Actions taken by a business can influence its share price, as well as external factors like a global pandemic or conflict overseas. While these are things you have less control over, the decision to buy or sell lies in your hands.

If you sell a share for a price that is lower or the same as what you initially paid, taking into account brokerage fees, you’ll make a capital loss.

What is the ASX?

The ASX is short for the Australian Securities Exchange. It’s where Aussie shares can be traded.

There are more than 2,000 listed companies on the ASX. If you buy a share in a company it means you own a part of that business. The more shares you have in a company, the bigger the slice you own.

Company share prices can change and you can see the prices of shares on the ASX, which is usually open for trading on weekdays between 10am and 4pm Sydney time, but may be closed or open for half-days on public holidays.

 

How much risk should I take on?

Your age and investment timeframe can help you decide on your risk comfort level. For example, if you’re in your 20s and plan on investing well into your 60s, you may be able to withstand sharemarket peaks and dips better than someone with a shorter investment timeframe.

Your lifestyle and personality are also factors you can use to gauge how much risk you can tolerate. You would ideally want to invest an amount that, even in the worst case scenario, won’t have a major impact on your lifestyle.

 

How can I manage risk?

Diversifying your share portfolio, rather than putting all your money into one company or industry, could help mitigate potential risks. This means spreading your investments across a range of sectors, like energy, financials and healthcare, and having a mix of larger and smaller companies in your portfolio. You can even diversify by considering other “asset classes”, such as property, bonds etc.

Exchange traded funds (ETFs), which give you exposure to a bunch of different companies, assets or industries, are one option to help diversify your portfolio.

Where to buy ETFs?

Through CommSec, you can choose from any ETF listed on the ASX, or opt for one of ten themed ETFs – like tech, sustainability or the biggest 200 companies on the ASX – through CommSec Pocket.

 

Tools to help manage risk

There are plenty of tools available to help you manage risk, but a good place to start is usually with the stock broker you trade with.

With CommSec, you can get a quick snapshot of how diversified your shares are across different industries and whether you’re overexposed to a particular sector. And, the share quality health check will tell you how experts rate your shares, and whether other investors are buying or selling the shares that you hold.

A difficult decision to make when investing is knowing when to sell. If the share price of a company in your portfolio starts to drop, you might feel torn between selling to avoid any future losses, or holding on for a potential rebound. Setting up a conditional order through your CommSec account can help you manage these decisions. It means you can automatically place a sell order if your share falls to a particular price, based on your risk tolerance. This may be helpful for those who aren’t constantly monitoring the sharemarket and want to safeguard themselves from a sudden drop in price.

 

4 ways to manage risk

While most investments carry some form of risk, there are ways to mitigate these risks. For example:

1. Diversify your investments

2. Keep a close eye on your portfolio

3. Use dollar cost averaging to reduce your market-timing risk

4. Do your research before taking on any investment

If you’d like to learn more about investing, head over here.

CommSec vs CommSec Pocket: What’s the difference?

Unsure about whether to invest with CommSec, CommSec Pocket, or both? Use this side-by-side comparison.

What to ask yourself before selling shares

Don’t let emotions cloud your judgement when it comes to selling shares. Here are some useful things to ask before making a decision.

ETFs Explained

Exchange-Traded Funds (ETFs) are pooled investments that can be traded just like shares, giving investors access to a range of assets.

Important information

Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. CommSec is a Market Participant of ASX Limited and Cboe Australia Pty Limited (formerly Chi-X Australia Pty Limited), a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.

This information is not advice and is general in nature. The information has been prepared without taking account of the objectives , financial situation or needs of any particular individual. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to the individual's objectives , financial situation or needs, and, if necessary, seek appropriate professional advice. You can view the CommSec Terms and Conditions, Product Disclosure Statements, Best Execution Statement and Financial Services Guide, and should consider them before making any decision about these products and services.

Past performance is no guarantee of future performance.

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Disclaimer

© Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. CommSec is a Market Participant of ASX Limited and Cboe Australia Pty Limited, a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.

The information on this page has been prepared without taking into account your objectives, financial situation or needs. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to their objectives, financial situation or needs, and, if necessary, seek appropriate professional advice.

The content on this page may not be distributed or reproduced without prior consent and any unauthorised use of the content may breach copyright provisions. CommSec does not give any representation or warranty as to the accuracy, reliability or completeness of any content on this page, including any third party sourced data, nor does it accept liability for any errors or omissions.

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