By Lilian Olubi 

The American economist, Benjamin Graham, popularly known as the father of value investing said this about risks: ‘‘The essence of investment management is the management of risk not the management of returns’’.

I find the quote to be quite apt because risk is inseparable from return and is the age-long and proven basis of return assessment that low levels of risk are associated with low potential returns and high levels of risk are associated with high potential returns. Hence the understanding and management of risks are key for every investor.

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The concept of risk management describes how an investor or investment manager analyses and attempts to quantify the potential for losses in an investment to determine the appropriate action given desired objectives and risk tolerance levels.

Every investment involves some degree of risk. A good understanding of risk which are quantifiable both in absolute and relative terms can help investors to better understand the opportunities, trade-offs, and costs involved with different options. A simple example of low-risk investments are Treasury Bills which typically have no default risk while equities in emerging or frontier markets would be considered very high due to their extreme volatilities in currency, high inflation and sometimes, unregulated markets. These investments would typically offer higher returns.

In this article, we are going to lightly analyze the concept of investor risk appetite and attempt to carve out a balancing attitude to the swinging pendulum. 

Risk appetite: The level of risk that an investor accepts while pursuing objectives before deciding to take any action to reduce that risk. It is a fundamental part of the risk management process. Each investor must decide how much risk they’re willing and able to accept for desired return. This ideally should be based on factors such as age, income levels, investment goals, liquidity needs, time horizon, and sometimes personality, which are then coloured by external factors such as how mature the markets are, the available competition, possibility of innovations or technological breakthrough and so on. 

Some investors have more risk capacity than others and are just naturally more daring and adventurous while some are simply and innately risk averse, tending always to the safest possible options.

Portfolio diversification: An effective method for investors to balance the varying risks and protect themselves from too many losses is by diversification. This is a risk management technique where the investors allocate their investments across different options with varying risk profiles, thereby reducing concentration risk.

An investor should seek to diversify among different asset classes and possibly different jurisdictions. A combination of asset classes like stocks and bonds for example will reduce your portfolio’s sensitivity to market swings because they typically move in opposite directions and unpleasant movements in one is likely to be offset by positive results in another.

In addition to this, an investor should look out for concentration risk within the chosen vehicles ensuring for instance that there isn’t an overexposure to a given stock or sector in the equities basket. 

In conclusion, risk is an inevitable factor in investment as with life and is an integral part of growth and asset expansion. It is incumbent upon all investors to find the best possible balance in assessing , mitigating and embracing these risks. 

Olubi is the CEO, EFG Hermes Nigeria