Three Practical Ways to Manage Your Risk in Investing - CommSec (2023)

Three Practical Ways to Manage Your Risk in Investing - CommSec (1)


Three Practical Ways to Manage Your Risk in Investing - CommSec (6)CommSec

12. November 2018

Risk management is the practice of minimizing the potential for future losses in your portfolio. There are a number of tools and strategies that investors can use to try to achieve this and we will look at some of them below.

Three ways to manage risk when investing:

  • Risk-Reward Ratios – help you determine your level of risk before making a purchase.
  • Set a stop loss – remove emotion from your decisions by setting conditional orders.
  • Diversification - Spread your investments across multiple sectors and industries so you are less affected by single events.

Implementing some of these ideas as part of your investment plan can help you develop sound investing habitslong term.

(Video) CommSec Trading Tutorial: How to buy shares and ETFs

Three Practical Ways to Manage Your Risk in Investing - CommSec (7)

risk/reward ratios

Risk-reward ratios help you understand the level of risk you can handle while holding onto a stock. To use a risk/reward ratio, you need to determine your expected valueto returnAndRisk appetitesfor a particular stock - before you buy it.

For example, let's say you believe that one stock in your portfolio will yield a 20% return on your initial investment. There should be an associated loss level that you are willing to endure in order to achieve that 20% gain. You might decide you're ready to drop the stock 10% while waiting for it to deliver your 20% return. That means your risk-reward ratio is 2:1.

The ratio is a good planning tool when evaluating your portfolio because it helps you make rational decisions about your holdings. Hopefully, if the stock falls before it meets your expected rate of return, don't panic about what to do -- you've already decided how low you're willing to drop the stock before you sell it.

The risk level you calculate should be based on the stock's historical trading range. Does the stock tend to fluctuate around a specific high or low point and do you feel confident that it will stay within that range? You should also consider your personal risk tolerance and how much capital you would like to lose.

Remember that when your investment falls, you often need an excessive price recovery to recoup your original expenses. However, predetermining a risk level gives you the opportunity to limit your losses.

Conditional Orders

One of the most difficult decisions for investors is deciding when to sell an investment. This is especially difficult when the stock price of a company in your portfolio is falling rapidly. You might be concerned that the longer you hold onto the stock, your losses will increase. But then again, it's hard to let go of a stock when you know you're missing out on the potential for a recovery. What must a shareholder do?

A common tool used by investors to avoid these situations is what is known as a "stop loss" or "falling sell" order. This is an order that automatically places a sell order in the market when your share price falls to a certain "trigger" level. The trigger amount is whatever you choose based on your risk tolerance and risk to reward ratio. Determine a price at which you would be willing to exit your position down and set a stop loss when your stock price reaches that level. The conditional order allows you to further limit potential disadvantages.

You canSet up conditional orders1Use of your CommSec account at no additional cost.Look for “Conditional Orders” in the trading menu.1

It is important to realize that once your stop loss is triggered, the stock price still has potential to recover in the post-sell period. Although you may wonder if you sold too soon, it's an opportunity to examine your beliefs about the company in question and consider whether it could still be a worthwhile part of your portfolio. In this scenario, you should research the company thoroughly until you are sure that you are ready to invest again.


diversificationcan be used as a risk management strategy as it reduces the likelihood that a single event or situation could pose a major threat to your portfolio.

(Video) CommSec Trading Tutorial For Beginners 2023 | How To Buy Shares In Australia

Although buying a larger number of shares will usually give you greater diversification, this is not guaranteed. It's important to look at the sector and industry into which each of your investments falls and to select companies in sectors that are influenced differently by market and economic forces. This reduces the likelihood that all stocks in your portfolio will fall at the same rate at the same time.

Investors pursuing a diversification strategy should seek to identify companies that have the ability to generate earnings growth in different conditions and times in the economic cycle. For example, an insurance company generates different earnings than a large retail or consumer goods company.

In the long run, proper diversification will help your portfolio weather the swings of market cycles and market downturns without suffering significant losses in value.

Let's finish

  • A few simple risk management strategies can give you the framework to manage your portfolio and achieve your investment goals.
  • Risk-reward ratios can help you determine what level of risk you are willing to take on an individual investment.
  • Conditional orders can be used to automatically place a sell order if your stock falls to a certain price, limiting your potential for further losses.
  • Diversification across companies affected by different economic conditions means your portfolio is less likely to be wiped out by a single event.


Strategy & Education

View all insights

You might also be interested in..

(Video) Commsec Pocket App Review 2023 | (Step By Step Beginner's Guide)

Strategy & Education

What to consider when managing risk when investing

Three Practical Ways to Manage Your Risk in Investing - CommSec (9)CommSec

12. November 2018

Explore risk management theory and tools. What does risk management mean for investors? How do you determine your risk tolerance? And what should you do when things don't go according to plan?

Continue reading

Strategy & Education

Getting a grip on asset allocation

Three Practical Ways to Manage Your Risk in Investing - CommSec (11)InvestSMART

16. October 2018

There is no such thing as an investment with a 100% return guarantee. That's why it's so important not to put all your eggs in one basket. But how to choose the baskets?

Continue reading

Strategy & Education

Six things every investor should consider when planning their investment

Three Practical Ways to Manage Your Risk in Investing - CommSec (13)CommSec

3. August 2018

Sticking to an investment plan is the key to success for many investors. We look at why planning is so important and how to create a investing plan that works for you.

Continue reading

Start trading with Australia's leading online broker today

Join now >

(Video) Commsec Mobile App Tutorial For Beginners 2023 | How To Buy Shares/ETFs In Australia (Easy)

Important information

1If the market is moving quickly, there is a risk that your limit order will not be filled or that your market order will be filled at a much less favorable price point than your trigger conditions. It is also possible for highly volatile securities to trigger conditional orders and then move against you, leaving you with no money. However, you can minimize these risks by carefully setting your trigger and limit prices and by researching the securities in your portfolio. While placing your conditional order is free, normal brokerage fees apply when your conditional order is filled.

This information is directed at and available to Australian residents only and does not constitute a recommendation or forecast.

This article is intended to provide general information of an educational nature only. It does not take into account a reader's financial situation or needs and should not be construed as financial product advice. Investors should consult a range of resources and, if necessary, seek professional advice before making any investment decisions regarding their objectives, financial and tax situation and needs as these have not been taken into account. Any securities or prices used in the examples are for illustrative purposes only and should not be construed as a recommendation to buy, sell or hold. Past performance is not an indication of future performance. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (“the Bank”) and both entities are incorporated in Australia with limited liability.



What is the best way to manage risks for investments? ›

8 Strategies to Reduce Investment Risks:
  1. Understand your Risk Tolerance: ...
  2. Keep Sufficient Liquidity in your Portfolio: ...
  3. The Asset Allocation Strategy: ...
  4. Diversify, Diversify and Diversify: ...
  5. Instead of Timing the Market, Focus on Time in the Market: ...
  6. Do your Due Diligence: ...
  7. Invest in Blue-Chip Stocks: ...
  8. Monitor Regularly:
Sep 22, 2022

What is an investment risk and how will you manage it? ›

Definition: Investment risk can be defined as the probability or likelihood of occurrence of losses relative to the expected return on any particular investment. Description: Stating simply, it is a measure of the level of uncertainty of achieving the returns as per the expectations of the investor.

How do you manage risk in a stock portfolio? ›

The process of diversification, spreading your money among several different investments and investment classes, is used specifically to help manage market risk in a portfolio. Because they invest in many different securities, mutual funds can be ideal ways to diversify.

What are the four 4 ways to manage risk? ›

There are four primary ways to handle risk in the professional world, no matter the industry, which include:
  • Avoid risk.
  • Reduce or mitigate risk.
  • Transfer risk.
  • Accept risk.
Sep 8, 2020

Which are 5 risk management strategies? ›

The basic methods for risk management—avoidance, retention, sharing, transferring, and loss prevention and reduction—can apply to all facets of an individual's life and can pay off in the long run.

What are the 3 risk management strategies? ›

There are five basic techniques of risk management:
  • Avoidance.
  • Retention.
  • Spreading.
  • Loss Prevention and Reduction.
  • Transfer (through Insurance and Contracts)
Jun 22, 2022

What are the three main risk management strategies? ›

There are four main risk management strategies, or risk treatment options:
  • Risk acceptance.
  • Risk transference.
  • Risk avoidance.
  • Risk reduction.
Apr 23, 2021

What are 3 types of risk mitigating controls? ›

What are the four types of risk mitigation? There are four common risk mitigation strategies. These typically include avoidance, reduction, transference, and acceptance.


1. CommSec Learn How to invest in ETFs
2. CommSec review 2021 - is it worth the high fees?
(Investment Finder)
3. CommSec Mobile App - How to buy shares
(Sanjee Sen)
4. Trading Up-Close: Stop and Stop-Limit Orders
(Charles Schwab)
5. Stock Order Types: Limit Orders, Market Orders, and Stop Orders
(TD Ameritrade)
6. The art of investing, tools available at your fingertips - Steve Mater, CommSec
Top Articles
Latest Posts
Article information

Author: Manual Maggio

Last Updated: 02/19/2023

Views: 6289

Rating: 4.9 / 5 (49 voted)

Reviews: 80% of readers found this page helpful

Author information

Name: Manual Maggio

Birthday: 1998-01-20

Address: 359 Kelvin Stream, Lake Eldonview, MT 33517-1242

Phone: +577037762465

Job: Product Hospitality Supervisor

Hobby: Gardening, Web surfing, Video gaming, Amateur radio, Flag Football, Reading, Table tennis

Introduction: My name is Manual Maggio, I am a thankful, tender, adventurous, delightful, fantastic, proud, graceful person who loves writing and wants to share my knowledge and understanding with you.