Focus on risk, not profit

STI has been trending up for the past few weeks, and reading from some of the stock forums, I know many people have gone into the market with the hope of making a quick profit, as they can't resist that other people are making money. Before all of us(including me) get carried away, I thought I just share my 2 cents on risk and reward. Many of us when we invest, we always look at the rewards or profit first, how much we are going to make from this counter, share price is going up or in local term 'cheonging', how much higher can it go. We have forgotten one very important thing which most people neglect, it is the risk.

Some of these risks that we want to be aware of are :

1. Are you having your portfolio skewed towards certain sector - Remember a time when Reits were very popular, if one is not careful, you might end up with more than half if not all of your portfolio with Reits counters. They should be some form of diversification in the portfolio as not all sectors go up and down together in the same cycle.
2. What is the downside at your entry price - when you decided to buy the equity, are you buying at the 52 wks high. If you are, don't you think that your risk is higher as compared to one who bought at its low and once the sector turns around, it can be very rewarding.
3. At the macro level, where is the standing of the major indexes now? At this level now, would there be higher risk or reward if one chose to invest now?
4. What price should you cut loss if you were wrong - Once you bought the equity, you should also know at what price you need to cut loss, should your decision to buy is a wrong one. No one knows how the market will turn out next week, next month or next year. If market tells us that we are wrong,we should not go against it. Importantly we must preserve our capital.
5. One of the difficult decision is when to sell one's equity, I am still learning on this one. Many a times, when the counter goes in the right direction of your purchase, when would be the right time to take profit. Most of us would said hang on and wait for a while, it should go even higher, sounds familiar :) One has to ask what is the risk if you do not take profit now, and has it already met your original target profit.

There had not been huge swing in the market after the last speech by Federal Reserve Chair Janet Yellen, but that does not mean it will not in the coming months. Let's hope the party still continue but do watch the downside risks.