Every investment has a risk, though the level of risk may differ. An investment might cause one to lose all the resources that one invested in, and even some investment products might cause more loss than the principle. When an investment is made, the buyer of the investment product is fully responsible for the profit and loss of it, which is why risk management is a necessary skill in proper investment.
The financial market runs based on the flow of capital, and these flows follow certain principles of the economy. Among those principals, one is “high-risk high return”, which means that the return of the investment is proportional to the risk. This means that people should not invest in a product by only looking at the possible return, and people should study the product enough before investing to understand the risks. This is an often-made mistake among people, which the investment only depends on one’s luck. There are numerous examples in online communities, as there are many people who experienced huge losses without studying beforehand, only with the excitement that they might be able to earn a huge profit. If one fully understood the risk of an investment, one can be responsible for the investment being made. One can rationally decide how much capital and resources one will invest based on the risk, and the investment should not include the cost of living for at least 3 months. It depends on the decision of individuals, but normally a rational decision should not be investing heavily in high-risk products.
After studying the risks of interesting and attractive investment products, diversification is very helpful to mitigate the risks. There are numerous investment products in the financial market, such as stocks, bonds, cryptocurrencies, real estate, mutual funds, derivatives, ETFs, gold, and fine arts. Some of these products have correlations, and others do not. One thing common in all these products is that they all have risks as stated before, and any of them can fail, as the financial market is full of uncertainty. Therefore, an investment portfolio is highly recommended to be diversified, so that one can hedge the risk of failure in one product.
The fundamental of managing risk in investments is to be able to make rational decisions. Being able to understand the risk of an investment product, and diversifying the portfolio are two big elements of risk management, and everyone should be responsible for their investment.
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