Q&A with Apricot: How do investors manage risks?

Any investment is associated with risk. That’s why it’s crucial to understand and manage the risks related to your investments. In this article, we’ll discuss the main risk management methods and strategies that investors use to minimize potential losses.

What Is Risk?

In the case of investments, risk is the probability of an asset’s (stocks, bonds, ETFs, etc.) value decreasing and, as a result, the potential for losing money. While it’s impossible to completely eliminate risk, it can be managed by applying specific approaches.

In the world of investments, there is a connection between risk and return: the higher the risk of an investment, the higher the potential return. This rule means that investors who are ready to take on higher risk expect a greater return. However, it’s important to remember that high risk doesn’t always guarantee a high return, and losses are also possible. Generally, safer investments have lower returns.

Key Risk Management Strategies

Investors use various strategies to manage risk, based on their financial goals and risk tolerance.

•   Portfolio Diversification

This is perhaps the most well-known and fundamental risk management strategy. Diversification is the process of distributing investments among different assets to reduce the impact of losses from a single investment.

This can involve investing in different sectors (e.g., technology, healthcare, finance), different countries, or different asset classes (e.g., stocks, bonds, real estate). A diversified portfolio assumes that if one sector or asset type performs poorly, others may be able to offset those losses.

•   Asset Allocation

Asset allocation is a more structured approach to portfolio diversification. It involves distributing investment funds among different asset classes based on risk tolerance, investment goals, and time horizon.

A young investor with a longer investment horizon and a higher risk tolerance might have a more aggressive allocation (e.g., 80% stocks, which are considered higher-risk instruments, and 20% government bonds, which are considered lower-risk). A more conservative investor who is nearing retirement may have a more defensive allocation (e.g., 20% stocks and 80% government bonds), as they want to preserve their capital.

• Periodic Rebalancing

Rebalancing is the process of maintaining a portfolio’s allocation over time. As the value of different assets changes, your portfolio’s initial allocation may drift. You can read more about portfolio rebalancing in our “Glossary” section.

If your stocks grow significantly, they may make up a larger portion of your portfolio than intended. Rebalancing involves selling a portion of the stocks and using the proceeds to buy lower-risk assets (e.g., bonds) to return the portfolio to its original allocation.

•   Using Specific Tools

Investors can also use certain tools to reduce risk.

• Stop-Loss Orders | This is an instruction to a broker to sell a security if its price falls below a certain level. This helps limit potential losses. You can set up such orders in the Apricot Capital mobile app.
• Defensive Assets | Investors often invest in assets that are considered safer (e.g., government bonds).

Risk management is an integral part of investing. A well-designed strategy helps you achieve your investment goals while managing the impact of unexpected market volatility.

Ready to Start?

Open a brokerage account for free and download our Apricot app from the App Store or Google Play. Learn more about investing in Apricot Academy. 

It’s important to remember that investments are subject to market fluctuations and carry inherent risks. Consider your financial goals and risk tolerance before investing.

Apricot Capital is regulated by the Central bank of Armenia.

*The examples in this text are for illustrative purposes only. This does not constitute investment advice or a recommendation to buy or sell any specific investment instrument. The past performance mentioned in this text is not indicative of future results.