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Managing Investment Risk By Investment Planning

Managing Investment Risk By Investment Planning

People are always thinking about how they can get richer, how they can increase their income and be sure they have enough money for when they retire. This does require some planning as well as risk, and here are a few ideas that may help.


What Is Risk?      

Risk is an uncertainty with respect to your investments that has the potential to negatively affect your personal wealth. However, the greater the uncertainty you are prepared to accept, the greater the potential for higher returns on your investment. 


Can you handle Loss?                                                 

When you invest, there is no guarantee you will get all of your money back. Generally, the lower the risk, the lower the potential return you can expect. If your objective is to grow your investment in value, then you will have no choice but to accept a certain degree of risk. 


Risk Perspective

After several crises, we are reminded of the risk of investment, especially the risk of market declines. Although market declines cannot be prevented, with the proper personal wealth planning, risk can be minimised based on an individual’s risk appetite and financial goals by applying the following Investment Planning process. 


Managing Investment Risk By Investment Planning


Six Step Investment Plan

1. Identify Needs & Objectives: The purpose of establishing a goal is to form the foundation of planning itself. You should begin your financial journey by clarifying your financial destination. The purpose of money should follow the purpose of life. Here are examples of questions that can help you identify needs & objectives: 

  • At what age do you want to retire? How much money will be enough for your retirement? 
  • If you have children, how much do you need to care for and educate them?
  • How much do you know about investment products such as stocks, bonds, mutual funds, gold, etc.?
  • What is your financial goal? 

Financial Goal is the guiding philosophy to direct individual investment objectives.

2. Gather the Relevant Data: The purpose of collecting required information is to help you develop appropriate strategies and determine the financial products to reach your goal. To assist you, the relevant data should help you answer the following questions:

  • How much time do you think it will take to accomplish your goal? Some of you may want to spend five years to invest for retirement while others may plan to spend twenty-five years investing for their retirement. 
  • What is your risk tolerance (the amount of risk you can accept)? 
  • What kind of portfolio is right for you? 

3. Analyse the Data: After all the required information is gathered, it’s time to analyse it. Let’s use Retirement Planning as an example. Assume that you need one million Baht for retirement and you want to retire in 30 years. You have already saved 50,000 Baht in your account and expect to save 250 Baht per month with an expected investment return of 8% p.a. Is this enough? Is your retirement goal achievable? Often, the initial assumptions are not quite enough to obtain the goal. 


Managing Investment Risk By Investment Planning


4. Develop your Plan: Back to the previous example. You need one million Baht for retirement. After the calculation you will have approximately 920,000 Baht in your account. So, you are short by around 80,000 Baht. Here, then, are alternative solutions: 

  • Take more risk: You may increase your exposure to riskier investment assets such as stocks or active management mutual funds and then assume a 9% rate of return. All else being equal, a 9% rate of return will bring your investment value up to approximately 1.2 million Baht. 
  • Save more money: If you think the stock market is very volatile and you do not want to increase your exposure to riskier investment assets, you may increase your monthly savings from 250 Baht to 305 Baht per month. Your investment value at the end of 30 years will then be worth one million Baht as well. 
  • Extend the time horizon: If you don’t agree with the previous two solutions because of the increased risk or reduction in monthly expendable income, which could affect your lifestyle, then extend your target for retirement from 30 to 32 years. With this method, your investment value will also reach a value of one million Baht, your targeted goal. 


Managing Investment Risk By Investment Planning


5. Execution: This step sounds very simple, but many people find it the most difficult in their financial planning. Although you plan to save 250 Baht per month, it takes discipline and a strong enough desire to put your plan into action. Joining an investment community or consulting with financial advisors may help you decide on what are the right investment tools for you.

6. Monitor the Plan: Things change all the time, so think of what can affect your life such as marriage, the birth of children, career changes, etc. Then there are changing interest and inflation rates, stock market fluctuations and economic recessions. All of these can have an impact on your financial planning. You may want to refer back to the early steps and re-evaluate. You may also want to consult with a professional financial planner to evaluate your plan on a periodic basis, maybe