Amid the Tussle of Bulls and Bears, Manage Your Shares

“Stock markets are always right. Never time the market”

- Rakesh Jhunjhunwala, India’s Big Bull

These wise words from the late Indian investor, often referred to as the Indian Warren Buffett, resonate deeply in today's interconnected world. Businesses now face unprecedented volatility in the global market. Economic shifts, geopolitical tensions, natural disasters, and technological advancements can all impact operations and profitability.

A current example is the recent unrest following Iraq's attack on Israel, which has led to soaring crude oil prices and foreign investors exiting their holdings in India. Additionally, China’s stimulus plan aimed at boosting its economy has created further uncertainty, although it ultimately had little impact. Such sudden changes and significant volatility can dramatically affect your investments. In this article, we will discuss how to implement a robust risk management strategy to navigate these challenges effectively. (If you have just entered investing, read this article to learn about various the strategies and tools available to small retail investors)

Risk in a global market can take many forms, including:

• • Market Risk: Changes in consumer demand and market conditions can affect sales.
• • Market Risk: Changes in consumer demand and market conditions can affect sales.
• • Financial Risk: Currency fluctuations and interest rate changes can impact profits and costs.
• • Reputational Risk: Negative publicity or social media backlash can damage a brand’s image.

Here are six actionable strategies for effective risk management:

1. Conduct a Comprehensive Risk Assessment

Begin by identifying potential risks that could affect your investment. This includes analyzing both internal and external factors.

Example: Imagine you have invested in paint companies. Due to the current situation in the Middle East, crude oil prices have surged. Since oil is a key raw material for producing paint, this increase in costs can squeeze the profit margins of paint companies. As a result, you might see a drop in their share prices.

2. Diversify Your Investments

You might be familiar with the phrase “Avoid keeping all your eggs in one basket.” Relying on a single stock can be risky. Diversifying your portfolio by investing in multiple assets such as fixed deposits (FDs), equities, gold, and bonds can help mitigate this risk.

Example: During the COVID-19 pandemic, the stock market experienced a sharp decline. However, investors who had diversified their portfolios with a mix of assets like bonds, gold, and fixed deposits were better protected. While their stock investments might have dropped, the stability of bonds and the rise in gold prices helped cushion the overall impact on their portfolios.

3. Implement Flexible Financial Strategies

Maintain financial flexibility by keeping a healthy cash reserve and an emergency fund. This can help you weather downturns or disasters without resorting to debt. Often, investors need to exit their holdings at a loss due to liquidity crunches or financial crises. Having a healthy cash reserve in your savings account and an emergency fund can help you manage and plan for your future without compromising your investments.

Example: The stock market is volatile, and if your portfolio has a greater number of risky small-cap stocks than blue-chip companies, you will need a healthy amount of cash to survive temporary dips in your investments. This way, you will not need to cut your holdings or reduce your investments during tough times.

4. Foster a Culture of Risk Awareness

In today’s fast-paced financial environment, staying ahead of potential risks is crucial. Utilize technologies like data analytics and risk management software to monitor risks in real-time. These tools can provide valuable insights into market trends and potential threats, allowing you to make informed decisions. Additionally, cultivate a habit of staying informed by regularly reading news, articles, and reports. This proactive approach helps you identify potential issues before they escalate, ensuring you can take timely action to protect your investments.

Example: Legendary investor Warren Buffett emphasizes the importance of continuous learning and risk awareness. Buffett reads extensively, including articles, books, and reports on various topics such as market trends, geopolitical events, and economic forecasts. This habit allows him to detect potential problems early and make strategic decisions to mitigate risks.

5. Regularly Rebalance Your Portfolio

Maintaining the right asset allocation is crucial for managing risk and achieving your investment goals. Over time, the performance of different assets can cause your portfolio to drift from its target allocation. Regularly rebalancing your portfolio ensures that you maintain your desired level of risk and return.

Example: Suppose your target allocation is 60% stocks and 40% bonds. If stocks perform well and grow to 70% of your portfolio, you might be taking on more risk than intended. By rebalancing, you would sell some stocks and buy bonds to return to the 60/40 allocation, maintaining your risk tolerance and investment strategy.

6. Embrace the Power of Compounding

Compounding is a powerful financial concept that can significantly boost your investment returns over time. It involves earning returns on both your original investment and the accumulated returns from previous periods. The longer you let your investments grow, the more pronounced the compounding effect becomes. By starting early and reinvesting your earnings, you can take full advantage of compounding, helping you achieve your financial goals faster and with less effort.

Example: Imagine you invest ₹10,000 at an annual interest rate of 8%. In the first year, you earn ₹800 in interest, making your total ₹10,800. In the second year, you earn interest on ₹10,800, not just your initial ₹10,000. This process continues, and over time, your investment grows exponentially.

While we addressed the potential risks and various strategies to navigate through them, the most important aspect of investing is one’s mindset. Many enter the market, viewing it as a foolproof casino, but remember, while there is room for dumb money, there is no room for gullible and ignorant investors. You need to be vigilant; you need to be patient; investing is a lengthy process, much like planting trees. Some may reap, some may bear fruit, while others may dry out or turn out to be weeds. You need to constantly review your holdings, identify the fruit-bearing stocks, and nurture them. Invest in them but do not be too emotional to book losses when you spot your weeds. A proactive approach to risk management not only protects your investments but also positions you to capitalize on opportunities that arise from market fluctuations. By staying informed and adaptable, you can navigate the complexities of the global market with confidence and resilience.