5.4 Analysing and measuring risk

What this topic covers:

  1. Risk management
  2. Actively managing your portfolio
  3. Taking regular portfolio check-ins
  4. 5 ways to manage risk

Risk management

As we’ve seen in topic 2.2, defining your personal investment goals is a crucial part of risk management. It helps you understand your risk tolerance and informs your investment behaviours. Your age is also crucial: someone with a timeframe of say 30 years will have a different approach to risk than an investor who is older and approaching retirement. In general, the longer your timeframe for creating wealth, the longer you’ll have to wait for a recovery if the market dips. And this means that, hopefully, you won’t be forced to sell your investments because you need access to the money urgently at the worst possible time when the market is down. Of course, a longer timeframe won’t rule out your potential for loss, but it can reduce it.

“If you don’t know the rules of the game, you can’t play”.

- Lisa Skeete Tatum (CEO and co-founder of New York-based Landit)

Actively manage your investment portfolio

The key to risk management is taking an active role in the management of your portfolio. Being active means dedicating personal time and effort to overseeing your investment, and there are significant benefits to this approach. You could, for example, create a structured approach to how you operate in the sharemarket. This might involve coming up with a set of rules or guidelines to help you stick to a process when making investment decisions. It’s an effective way to maximise your time when managing your portfolio.

Consider some of the following factors to help determine your portfolio structure:

  • What stocks or sectors to include in your portfolio?

  • What stocks or sectors to avoid adding to the portfolio?

  • How many stocks should you hold in your portfolio?

  • How much of your money will you allocate to each holding?

  • Do you have a minimum holding timeframe for each share?

  • How much loss as a percentage are you willing to tolerate before you sell?

Having a portfolio structure is also a helpful way to manage your emotional and behavioural response to the constant fluctuations of the sharemarket. It supports your decision-making and directs your behaviour, so you can avoid taking on an excessive level of risk and minimise your potential for loss.

Take a regular portfolio check-in

You don’t need us to tell you about the benefits of a regular health check-up. So, you’ll understand why it makes sense to check up on your portfolio health, as well. In this case, to help you decide about your investments and whether you need to consider any alternative investments or strategies, CommSec provides two primary check-in tools.

1. Share Quality Health Check

With this health check, you’ll get:

  • A quick snapshot of how your shares are rated by a panel of Morningstar industry experts
  • Information on whether other investors are buying or selling shares that you hold

2. Share Sector Diversification Health Check

With this health check, you’ll get:

  • A quick snapshot of how diversified your share investments are across industry sectors
  • A view on whether you’re overly exposed to particular sectors
  • The ability to benchmark yourself against your peers and the ASX 200

While these tools are not intended to offer personal advice or recommendations, they are aimed at helping you get a better understanding of your investments and the factors that can affect their performance. To access these tools:

  1. Log in to the website

  2. Go to “Portfolio”

  3. Click on the "Health Checks" button next to the “Holdings” button

5 ways to manage risk

As we mentioned in the introduction, no investment is risk free, and as you’ve seen, there are ways to minimise the potential for risk. To remind you, here are 5 key ways:

  1. Diversify

  2. Review your portfolio regularly

  3. Use dollar cost averaging to reduce your market-timing risk

  4. Do your research before you take on any investment

  5. Invest for the long-term, not the short-term

That’s the final topic for now, but CommSec Learn will continue to evolve

Whether you’re a seasoned investor or a newbie, whether you’ve dipped in and out or followed CommSec Learn topic by topic, we hope you’ve enjoyed the journey and learned a lot on the way. Ultimately, the aim of CommSec Learn is to not only help you grow your investing knowledge at your own pace, but to arm you with the tools to invest confidently – whatever your goals.

CommSec Learn will continue to evolve and we’ll be adding more topics over time. We hope you’ll come back whenever you need a little refresher.

Next Topic: 5.5 Quick quiz


CommSec Learn is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative 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. CommSec is a Market Participant of ASX Limited and Cboe Australia Pty Limited (formerly CHI-X Australia Pty Limited), a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.




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