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Invest smart, put risk framework in place

To be a smart investor, knowing about the risks involved in a particular investment is not enough. One needs to take steps to restrict the extent of the loss that he might have to suffer.

business Updated: Jun 11, 2008 22:48 IST

To be a smart investor, knowing about the risks involved in a particular investment is not enough. One needs to take steps to restrict the extent of the loss that he might have to suffer. There are specific steps that can be taken to improve the position and here are some points to consider in the process.

Understand the risk level
The first thing to do is to understand the level of risk that the individual is actually facing. This means studying the asset in which the investment is taking place and the kind of hit that may have to be born.

Some of the risks are evident, while some other are not so. Such hidden risks might suddenly crop up and hence one should carefully analyse and understand such risks.

Look at risk bearing capacity
There are two things that need to be done once the risk is known. The first is to see the extent of risk that the person can actually bear so that the tolerance level is understood.

This will also help in structuring the entire investment portfolio. The efforts here will ensure that only a specific level of risk is maintained. The second thing that has to be seen is the probability of the loss occurring. This is important because if there is a high chance that there will be a loss, then the person has to be ready to face it and move on.

Plan for a loss
A plan should be ready so that when you have to suffer loss, you know what is the next step. This will ensure that there is some way out of the situation.

In many cases taking a proactive step is important because this can help in reducing the loss rather than waiting for things to get better. Sometimes people prefer to sit tight without taking any proactive step. In such a situation, the value of the investment will change depending upon the overall market conditions but the investor might not be able to make the best out of the chances that are presented to him. This can be a risky strategy in terms of a lost opportunity. If things deteriorates further, it would take more time to recover.

It can be quite some time before the situation improves and hence patience is also required in tackling such positions.