Managing risk does not mean avoiding risk; you will not be successful if you bury your head in the sand and your money in your mattress . If you want to accumulate wealth, your long-term investment strategy has to accept risk and learn to manage it. Managing wealth requires strategies and plans to protect wealth from the risks of litigation, ill health, premature death, and taxes.
Before starting you need to know that each investor has a unique ability, willingness, and need to take risk. So you first think about yourself, which risks have you took in the past and what you can loose.
Have a plan: Most of the people don’t have any plan, if you have a plan and follow it you will be ahead of most of them!. Having a plan will help you to find and correct the path to have what you want.
Think about risks: sometimes you could be surprised by unexpected events, the ones you never thought about before. Always be very careful and try to think outside the box to detect unexpected event. Risk identification could be done when you are making a pla, since doing it will make you think about alternatives that you never tough before.
Know your enemy: Everytime you do an investment the first enemy you will be fighting is randomess or uncertainty. In most of the situation when you find risk, you will find a random event that could occur with some probability, however uncertainty is your worst enemy since the probability is unknown. For some people uncertainty could be ignorance.
Knight gave a great definition of risk and uncertainty: “Risk is present when future events occur with measurable probability. Uncertainty is present when the likelihood of future events is indefinite or incalculable” (Knight 1921)
Now that you know about uncertainty it’s important to note that when buying stocks, don’t fall in the mistake of thinking that “The future will look like the past”. If you think that the past performance of a stock will tell you about it future, you are being foolishing you!.
Remember that when you have a plan, always follow that plan. If the market conditions changes, you need to adapt or change your plan accordingly. In your plan you need to have what to do when a riskier or unknown event occurs.