Managing Risk in the Markets is an Art and a Science

Investing is an activity that involves many relevant issues that we must take into account. But of all the things we are taught when we are learning to invest, one of the most fundamental is managing the level of risk in the market.

Image Source

What is the risk level?

In short, risk is nothing more than the possibility that the investment we make does not turn out as we expect, that is, it is the fact that we can obtain losses with our investment regardless of our degree of knowledge or foresight in the market.

Now, every investment implies a certain level of risk, and that is why we must understand how to measure the level of risk in the market. But even more so, we must know how much risk we are willing to assume in our investments, because this will depend on many factors; such as the size or dimension of our economic capital, our knowledge of the market in question and our own aversion to risk.

The volatility factor is also something to take into account when we invest and assess the risk of doing so. Stock markets are risky, yes, but crypto markets can be much riskier if you don't know that most cryptocurrencies involve high volatility. In this sense, we can note that BTC is a cryptocurrency with high volatility, but also with high liquidity and market capitalization. So, an analysis of the main cryptocurrency on the market would tell us that it is of great risk due to the high volatility of its price, but part of that risk is reduced by its high liquidity and enormous marketcap.

Image Source

How to manage risk?

As I already said, when investing in something (be it the stock market, cryptocurrency, real estate, currencies, or whatever), we have to consider and manage the level of risk we are willing to assume. In such a matter, it is important to evaluate things such as volatility, marketcap, level of liquidity and market dominance, among many other factors directly associated with the asset or sector in which we are investing.

But an even more important thing is to evaluate and know the level of risk that we are willing to take from a psychological point of view. Because if we have, hypothetically speaking, only $20 thousand dollars in our pockets and we take all of it to invest in something, the psychological pressure we will feel will be much greater than if we only take half or a quarter of that money to invest.

Because the psychological pressure that we can feel when faced with the risk of losing all our money in an investment is much greater than if we divide our capital and only invest at our discretion in the asset or goods that interests us.

But this implies having wisdom as an investor. Because in today's world people want to be successful in a big way in the markets and they want it fast. In this excessive ambition, many make the mistake of putting all their capital in a single investment, which means "putting all their eggs in the same basket". When in reality, they could put a fraction of their capital in the investment that interest them, while maintaining a reasonable level of financial liquidity.

Another advantage of dividing our capital when investing is that we can diversify our investment portfolio. The fact is that all this implies knowing how to manage risk in the markets. And if we understand this, we will be great investors.

Image Source

Knowing how to manage our financial capital is knowing what we do in the market

For example, I invest in the crypto market, and specifically I like to invest in BITCOIN, HIVE and LEO, therefore, I divide my capital so that I can distribute it reasonably between those three cryptocurrencies. But beyond the crypto market, portfolio diversification is something that can be applied to any type of asset or market.

The fact is that knowing how to manage our capital will make us more successful and give us greater possibilities of profit, while we reduce the psychological tension of knowing that we have our money wisely distributed among various options in the market.

But even more so, because an investor who knows how to manage its capital will never have liquidity problems, and personal liquidity, friends, is almost everything in the markets.

Image Source

Managing risk is an art and a science

It is then that we realize that learning to manage risk in the markets is both an art and a science; because it involves subjective factors (such as our psychological side), as well as objective factors (by analyzing the level of implicit risk of each asset) .

So investment books and conferences can teach us a lot about it, and even tell us about risk management, but what we can learn from all this will be up to a certain limit, because it will always involve a deep knowledge of ourselves.

To put it in perspective, a crypto asset like BITCOIN can be a very difficult risk to manage for a person who is not used to a high degree of volatility in the market. On the contrary, someone who likes the volatile nature of BTC will be in their element and will be able to make the most of the market.

So it's all a matter of how we analyze and how we see the risk, because wealth is out there, within the reach of every investor, but only those most capable of managing risk will be the ones who achieve it.

What do you think about the topic discussed? Please comment.

Gif created by @piensocrates