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Removing Luck from the Investment Equation

By Simon Cooper
February 21, 2022

Luck has always played a huge role in achieving success. There have been debates about what makes a successful person: pure skill or the influence of luck. People who are driven towards wealth creation usually argue that talent alone is not enough to be successful, talent merely steers you to the direction of lucky opportunities.

Starting a business is not uncommon but having your business grow and prosper is a privilege only a few enjoy. The general criteria for business like being highly strategic, effectively managed, and empowering is strictly followed by aspiring entrepreneurs but even then not everyone finds their way on top, some people argue that luck always has an effect on success. Of course, luck, being a phenomenon, gives a more understandable explanation as to how things came to be and no one would really question it because it is brought about by chance rather than one’s own actions.

But if you really want to achieve financial success, luck should be the last thing you should depend on. Hard work coupled with careful planning will always beat chances when it comes to investments. If you apply an effective management approach, you will have better comprehension on what to do and what steps to take for risk mitigation to effectively manage your business with minimal threats.

Financial risk is the possibility of losing money on a business venture or an investment. The risks mainly target the cash flow, or the money coming in, which will eventually lead to sudden losses that could potentially make your financial obligations difficult to manage.

What are the types of Financial Risk?

There are five major types of risks you have to watch out for:

  • Market risk – the risk of losses on financial investments due to the shifting business environment. This constant development affects how you do business because of the changes in equity or commodity prices, interest rate shift, or foreign exchange fluctuations.span>
  • Operational risk – the prospect of loss resulting from inadequate or failed procedures, systems or policies. Failures such as mismanagement, technical issues, substandard business model, and fraud consequently disrupt business processes that will take its toll on the overall business performance.
  • Credit risk – the possibility of a loss resulting from the client’s failure to repay a loan or meet contractual obligation. Extending credit to a client who fails to pay can lead to the disruption of cash flow and can significantly reduce your profit.
  • Inflation risk – it refers to how the prices of goods and services increase more than what was expected.This results in the same amount of money but with less purchasing power which puts the goal at risk because the returns must match the rate of inflation in order to increase real purchasing power.
  • Liquidity risk – is the inability of a company to convert its assets to cash if the need for cash arises. Should the company be unable to meet its financial obligations, they might eventually be unable to convert an asset into cash without giving up capital and income due to a lack of buyers or an inefficient market.

Game Plan: Investment Risk Management

Now that you have an idea of the kind of risks you may face, the next step is to take advantage of the resources you have, understand how much risk you are willing to take and your ability to endure losses because we all know that the best way of successfully defeating the enemy is knowing your strengths and understanding its weaknesses.

Know Thy Enemy Know Thy Self

For you to be able to comprehend your personal risk tolerance, there are a few ways you can do but listing a set of questions is easily the best option. Writing down questions can help you reflect, prompting a more consistent analysis later on.

Initiate Asset Allocation Mix

Once you are able to come up with an analysis regarding your risk tolerance, the next step is to develop an asset allocation mix that takes your risk tolerance into consideration while furthering your tailored investment goal.

The asset mix is the breakdown of all assets within a fund or portfolio. It is the process of dividing your investments among the various asset categories such as stocks, bonds, cash, and real estate. A diversified asset mix reduces the risk of investing and at the same time helps investors understand the composition of a portfolio.

The rate at which you want your investments to progress can also influence your asset allocation and risk tolerance. Younger investors with partiality for long-term goals usually prefer allocation with high concentration of stocks while superannuitants prioritise allocation on bonds and cash investments, avoiding the risk of losing money altogether.

Mission: Asset Diversification

A diversified asset mix may help your portfolio balance out gains and losses. The idea is that it helps minimise risk of capital loss to your investment portfolio. Aside from being able to reduce potential losses, it can also help you protect your savings. This is especially true to investors that are closer to the retirement age and prioritises preserving their capital. Additionally, aside from being a saving grace, diversified asset mix can also be an outlet in generating returns so you will not only rely on one source of income most especially when the investments don’t always perform as expected.

Engage Codename DCA

The Dollar-Cost Averaging or DCA could not be any simpler. It is an investment strategy wherein the investor divides the total invested amount across a certain pay period to be able to successfully reduce the impact of fluctuation on the overall purchase. This strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices.

Pick A Fighter

Just like in any successful mission, choosing the right teammates can help you succeed faster and with such ease. Going into an investment automatically means that you have prepared for the journey ahead but consider that even though how much you have prepared there will always be challenges along the way that require skills that are not exactly your strong suit.

At Forward360, help will always be given to you as long as you ask for it. We have a team of professionals that will help you through effective financial planning. We will work closely with you to set in motion a strategy that will not only help you in wealth creation but mitigate the risks you encounter along the way. Our doors are always open and our lines are always free, reach out to our customer support team today.

Simon Cooper

Co-Founder, Managing Director, Financial Adviser

Simon is a financial advisor who takes his work seriously. He ensures that all of his clients receive the best possible advice, so that they can reach and exceed their financial goals, both personally and professionally. Simon has been in the business for many years, and has a wealth of experience to share with his clients. He is known for being friendly and approachable, and always puts the needs of his clients first. Simon Cooper is an Authorised Representative of Reedy Capital Pty Ltd (AFSL No. 495539), Authorised Representative Number 1248807 and a financial adviser at Forward360.

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