How To Manage Investment Risk? Diversify!

Manage Investment Risk
Manage Investment Risk

Manage Investment Risk is a critical part of investing, but also necessary in business. Let me explain. Most people get the idea of managing risk with investing. It’s one of the core tenants in investing. Don’t put all of your eggs in one basket. It’s obvious we don’t have control over many aspects with investing, so to mitigate that risk we diversify. This includes not only by asset classes but also within the U.S. and internationally. Many business owners, and employees for that matter get tripped up with diversification with their career. They put all of their eggs in one basket, only for that basket to get crushed.

When owning a business you have much more control over your destiny but also your risk. However, how many stories have you heard of a well to do businessperson who had it all only to lose it when the company they founded went bankrupt. They obviously weren’t managing risk very well since most of their net worth was within their business. The same applies if you’re an employee working for someone else. If you were to lose your job, how long would you last with out it? Unfortunately, for many, they are just two weeks away from bankruptcy. In the case of an employee, most only have a single source of income, so I consider it critical you go out and get a side hustle. Start up that business you always wanted part-time.

Manage Investment Risk In The Things You Cannot Control

This is a key distinction. If you can control an issue, more than likely it’s not a risk. Risk is outside of your sphere of control (i.e. weather). Let me give you two personal examples. One I didn’t properly prepare for, and another I did.

The Bad Economy

I’ve owned my web hosting business for over ten years now. I’ve done pretty well with it, considering it’s a very competitive industry. We have a good niche in a crowded space. The problem is we cannot control the economy. As everyone knows, 2008-2009 was a horrible time to be in business. During that period we lost quite a few long term customers. It wasn’t because they went to other providers, or we were too costly, but they simply went out of business.

The ones who did stay with us didn’t want to expend much online. Frankly, from my discussions with them, many small business owners were terrified. Financially my business did ok during this period but had very little growth. Pretty much during this period, our growth was flat. Fortunately, I was one of the lucky industries that weren’t hit too hard during our recession. As you know, many others weren’t so lucky, like independent building contractors or employees in the financial sector.

The problem, in my case, is I didn’t Manage Investment Risk too well. I didn’t have a business strategy to complement my existing business income. So when the economy tanked, so did my business growth.

I decided to ask a great question, “What other business or service can I offer, that will do well if the economy does poorly?”

From my research, I decided to find another niche that I was interested in, but was also complementary to web hosting. From this TheCoinrise was born. Not only did I feel it was a missed niche, but it could complement my existing incomes.

From my research, I determined people become much more interested in finance when the economy tanks. Financial search queries increase during this time. People are looking for solutions to their problems. My goal is to create this site as a beacon for independent investors and small business owners. I also want to educate people so the next time the economy is bad, you’ll not only survive but thrive! It’s critical to anticipate problems before they are critical.

So while I cannot control the economy, I can control my focus of the business niches I am in. So in the future should one business do poorly, the others should do well. In the past five years, there have been much businesses that has done well because of the poor economy, such as:

  • Collection agencies
  • Home cleaners – To clear out the foreclosed homes abandoned by their owners
  • Grass painters – For foreclosed homes to make brown grass look green
  • Pawn Shops

I’m not suggesting you should go into these businesses, but realize a business can thrive while the economy is doing poorly. It’s possible your existing business can thrive too, it’s just the fact you need to adjust your marketing and sales to target a new need.

Data Center Failure – Manage Investment Risk

We colocate our servers in two data centres. I always believed in having at least two of them. The reason is that disasters happen. No data centre can achieve 100% uptime all the time because Murphy’s law applies. If a data center was down for long period of time (ie days), it could mean the end of my business. So I’ve always followed that belief and was very fortunate on that infamous day in 2001.

At the time, we had a data centre just a few blocks away from the World Trade Center. The data center wasn’t initially affected by the destruction on 9/11 but eventually went offline anyways. A power substation was downed because of the terrorist attack. A modern day data centre can deal with a power outage like they experienced, so power continued to run while there was no electricity downtown.

For those not familiar with what happened after the buildings collapsed, downtown was locked down. No one was able to get in or out. All bridges and tunnels were sealed off, including the diesel truck that was to replenish the data centre generator. So twelve hours later, all our computers went down.

Fortunately, we didn’t have all our eggs in one basket, and only half of our customers were affected by the outage. The ones that were affected, we worked with them to help bring them online at our other unaffected data center. If it weren’t for our alternative data center, our business would have been dramatically affected, and more than likely would have lost some important customers. Instead we got praised how quickly we were able to bring our customers back online after the terrorist attack.

Risk Assessment Exercise

So with investing, and in business, it’s critical you do a risk assessment every year. Know the possible risks and possible outcomes. List out the:

  • Risks – Go crazy with your list. Put even the absurd items, but be comprehensive
  • Chance To Occur – In percentage, what’s the chance of it happening within the year
  • Outcome – What will happen financially or future financial growth?
  • Hedges – What action(s) can you take to prevent this from occurring or minimize its the impact?

The best question I always ask is, “What’s the worst that can happen?” Once you create this list, attack the low hanging fruit first, the ones most likely to occur or the easiest to mitigate. Creating this list won’t obviously help with the “black swans”, but they more than likely be on your radar. By planning ahead of time for possible risks, you will minimize the possible outcome should they occur.