Why Risk Management is so Important

[rmani84]

Risk Management is so important in any kind of investment. Your investment can be Shares or Business or Speculative trading. Risk Management is a common concept in all kinds of investments.

Since, we are interested in Share investments and short term trading (Intra-day or Short term), lets take the example of stock investments.

Lets assume, you invest with a capital of 100 Rupees. Lets see how difficult it is to recover after a risky loss.

Small Risk of 10%:
If you take a risk of 10% and you lose, your capital will be reduced to 90 Rupees. To recover back your capital, you will need to gain a little over 11%.

Big Risk of 30%:
If you take a risk of 30% and you lose, your capital will be reduced to 70 Rupees. To recover back your capital, you will need to gain 43% after the loss.

Huge Risk of 60%:
If you take a risk of 60% and you lose, your capital will be reduced to 40 Rupees. To recover back your capital, you will need to gain 150% after the loss.

Do or Die Risk of 90%:
If you take a risk of 90% and you lose, your capital will be reduced to 10 Rupees. To recover back your capital, you will need to gain a whooping 900% after the loss.

If you make a blunder, you may have to wait for years and years to recover back. For traders, the risk is always high and things can turn ugly any-day anytime.

This is why investing safe and having patience on growth stocks with minimal risk is key to "Art of Stock Investing". To know more, read my Book on "Art of Stock Investing".

[Jagadeesh Balu]

Again many a times, we miss out the importance of power of compounding and go crazy behind some tips floating in the market. However see how many of these companies have year on year given great returns...

Even if you earn 12% from a particular portfolio for 15 years consistently , then your portfolio would be around 7 times what it is today. Check out the examples of companies like TTK Prestige , Asian Paints etc which have year on year performed like a stalwart....