Kavan Choksi: How to Carry Risk on Investment

Kavan Choksi: How to Successfully Manage Portfolio Risk

Investment risk is inevitable, so it's important to approach investment with your eyes open – and to try to maximize your potential return. This means there are several important factors to consider when deciding whether taking on the risk of a particular investment is worth it, explains Kavan Choksi.

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For example, when inflation is high, it's important to consider whether the potential return on an investment will keep up with inflation. In this case, the true value of any reward is eroded as the purchasing power of your money decreases (this possibility is even higher for cash equivalent and fixed-income investments, such as municipal or treasury bonds).

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Similarly, consider the costs or other fees associated with your investment. That is especially true if you invest in managed funds or exchange-traded funds (ETFs). Notes Kavan Choksi: if the management costs or transaction fees are especially high, they can eat into your potential returns. You should also carefully think about the purpose of your investment portfolio. Consider why you want to invest and whether the potential rewards will be high enough to meet your goal. For example, if you are planning for retirement, make sure you don't come up short with insufficient returns for your retirement needs or take too much risk that it affects your quality of life.

 

Finally, mull over the consequences of losing your principal on your investment: What would it mean to you and your family if you lost everything you invested? Would it result in you being unable to cover your daily expenses or force you to sell your other assets before you were ready to? If this is the case, you should invest in less risky assets. Reflecting on the answers to these important questions will help indicate the level of risk exposure you can handle and will help shape your overall risk strategy, points out Kavan Choksi.

Kavan Choksi is a business management consultant. He shares his insights on the stock market, business, finance, and economics on his blogs, which can be accessed here.