Chapter 1: Advanced Investment Principles
Now it's time to learn about more advanced risk management techniques.
These strategies can help you manage your risk effectively while maximizing your potential gains.
By understanding and applying these techniques, you can protect your investments and ensure a more balanced approach to growing your portfolio.
Beta management
Beta management involves comparing the beta values of different stocks when making investment decisions. Beta measures a stock's volatility relative to the overall market, helping investors assess risk.
By selecting stocks with specific beta values, you can aim for a target beta for your entire portfolio, balancing risk and potential returns according to your investment strategy.
But what is a high beta and a low beta? If you read our stock analysis and scroll all the way down, you will find the beta scale we use. We believe it is a good indicator for assessing beta and volatility.
High-beta stocks are more volatile and tend to move more significantly compared to the market, while low-beta stocks are less volatile and exhibit more stable price movements.
Basic hedging
Basic hedging involves buying an asset that moves in the opposite direction of another asset you own.
This strategy allows you to customize your risk profile, providing a way to balance potential losses and gains to better match your risk tolerance and investment goals.
An example of basic hedging would be buying shares in a tech company and also investing in gold.
These assets typically have an inverse relationship, meaning that if the tech company’s stock value declines, the value of gold is likely to increase, and vice versa.
Reasonable liquidity
Having a reasonable amount of liquid cash available to buy stocks when their prices drop is a great idea.
If used correctly, this strategy can lower risk and increase gains, allowing you to take advantage of market downturns by purchasing quality stocks at reduced prices
The correct range of extra cash in your investment account should be between 0% and 20%, depending on your risk tolerance and your anticipation of a market crash.
Keeping this cash reserve allows you to seize buying opportunities during market downturns while managing your overall risk.