Risk Management
Corporate
Challenges
In his analysis of some of the most significant corporate disasters in recent years, Victor P. Leginsky has identified several reasons for business failure. Ultimately, the Board of Directors determines which risk factors should be assessed and managed.
Risk Management in Investments
Risk management is vital for HEG Venture Capital Investments LLC, as it provides a holistic plan on how to gain more by risking less on your investments. Our organization is protected against potential losses, which never surpass the acceptable boundaries due to our “investment roadmap” that includes position sizing, diversification, valuation, loss prevention, due diligence, and exit strategies. This roadmap reveals the impact of these risks.
Risk management proactively enables investors to identify potential gains and losses on investments during difficult times and set their financial goals and expectations.
Therefore, establishing a strong investment strategy facilitates a sufficient source of capital for business growth in more favorable situations. Risk management in investments keeps investors safe, with steady profits regardless of market conditions, reducing the possibility of financial losses.
Risk management in investments is based on 5 principles:
1. Identifying and creating a risk profile
2. Setting up personal and portfolio objectives
3. Establishing an exit strategy
4. Explaining how the investments make business sense
5. Justifying the investment’s effect on risk profile and portfolio objectives
The investment factors are divided into two categories:
• Macroeconomic factors, which clarify the investment returns through asset classes
• Style factors, which describe the financial returns within asset classes
At the same time, risk management factors are classified in groups to focus on specific details, which ensure maximum returns on investments and reduce the chances of unexpected losses. These details are crucial in risk management as they enable investors to understand the assets’ ups and downs. Investment risk management encompasses four stages for a profitable investment.
These stages include:
Stage 1 No investment plan with fluctuating profits.
Stage 2 No risk management and investment know-how, but with a desire to accumulate wealth.
Stage 3 Investment plans based on tested principles, which create losses that can be avoided with greater experience. The portfolio has logical return characteristics.
Stage 4 Master risk management in investments, which creates independent investment strategies to generate a profitable portfolio.
Types of Investment Risks
During the investment process, investors are vulnerable to various types of risks. It’s vital to analyze all of these types to ensure cost-effective and efficient investments with the greatest returns on investments and financial growth.
Market risk includes equities, interest rates, and currency risks, which can be affected by financial or other developments in the market.
Regarding investments, you should consider a lower price if you want to sell. Otherwise, you may neither be able to sell your investments at the right price nor get the profits when you expect them.
Expert investors have the know-how to divide their investments into multiple segments or different types in order to disperse the risk throughout different categories, industries, and geographic locations. This is actually the way they reduce their financial losses.
Credit risks have to do with debt investments, so they can be examined by estimating the bond’s credit rating. This risk is based on the fear of uncertainty if government entities or companies will be able to pay the interest or repay the principal due to financial difficulties.
Risk Management Planning
Each investment risk management plan is based on specific steps that ensure increased returns. These steps include: asset allocation & market risk, diversification & specific investment risk, and valuation investing for individual investments.
Asset Allocation & Market Risk (Systematic Risk)
Asset allocation and market risk depend on the stock market activity, which can increase or reduce the value of stocks. Investors use asset allocation to manage the potential investment risks according to their perspective on investments. So, they set their probable maximum loss by deciding on the acceptable risk levels and financial losses. Their risk management planning reveals their willingness to lose part of their capital assets.
If investors invest when prices are below the primary value, they can encounter errors, misjudgments, or unforeseen problems. However, if they invest when the prices are overvalued, there is a greater possibility of suffering a financial loss because of unforeseen conditions.
Valuation Investing for Individual Investments
Each investor should evaluate their investments in order to hold assets with a good margin of safety, increasing the possibilities of success; the greater the edge of safety, the higher the probability of better returns on investments.
At the same time, they are ensured that they will not lose their investment capital while trying to accumulate wealth. The investment valuation is the ideal tool for long-term investments, as it guarantees that investors will not lose their principal in case the market performs poorly.
Diversification and Specific Investment Risk (Unsystematic Risk)
In contrast with asset allocation and market risk, investments or small groups of them can increase or decrease in price range without any correspondence with the market. This kind of risk can be reduced via diversification and valuation in order to mitigate the potential risk exposure without reducing the expected returns.
There are three diversification rules which draw the line between investment and gambling.
Gambling involves taking many risks that cannot be mitigated by diversification and investment are vulnerable to substantial financial losses.
At the same time, there is a great risk if investors have only one investment in their portfolio because their returns depend on these unique investments. Therefore, in order to create a smooth procedure for their returns, investors should break down their investment portfolio.
Diversification sets the framework for the risk management plans with three main rules. The first rule indicates that investors should put up to 5% in any one stock to defeat the purpose of diversification and mitigate risks.
The second rule indicates that investors should put up to 15% in any one mutual fund or Exchange Traded Funds (ETFs) to prevent poor performance. The third rule indicates that investors should put up to 25% in any one sector to prevent poor performance as well. When they limit their percentage invested, they minimize their potential losses and have greater returns on investments. They reduce their portfolio
risk by setting limits on their allocations.
Investment Strategy & Risk Management
• Avoid gambling and stay focused on long-term investments.
• Do not guesstimate the market by following forecasts, as this seems like gambling and not an investment.
• Invest in what you understand and generate a risk management plan and due diligence for your investment strategy.
• Focus on compound returns.
• Never include the same risk profile in any investment portfolio.
• Create an investment strategy that safeguards against risk exposure in order to accept a specific level of losses.
• Be an offensive investor that seeks new opportunities while being a defensive investor that knows how to handle risks and losses. This way, you ensure your purchasing power.
• Avoid liquidity, as it eliminates the possibility to manage investment risks.
• Respect investment expenses by taking advantage of great value-added investment opportunities.
• Investors should enhance their financial knowledge in order to improve their investment portfolio.