In cooperation with Freedom24 – When creating and developing a stock market portfolio, understanding the concept of risk management is essential and even strategic. We are taking inventory.
First, let’s characterize the risk associated with investing in the financial markets: if we are interested here, it is the market risk that is inherent in every investment. It is the risk of losing money, which is related to more or less brutal fluctuations in the prices of each asset that makes up the portfolio. Modern portfolio theory, developed by Harry Markowitz, relates this risk to market volatility, the extent to which an asset changes over time.
Therefore, all investors consider that the expected return they set for themselves minimizes the risks they take. In order to create effective investment strategies, it is worth exploring several additional avenues.
The 60/40 portfolio, an investment classic for a good father
The principle is simple: the investor builds his portfolio with two main pockets, one in stocks with a weight of 60% and the other in bonds with 40%. This traditional portfolio has the advantage of being able to benefit from the performance of strong securities during good times, with the bond portion playing an umbrella role during troubled stock market periods. Diversified in nature, this portfolio represents a core strategic answer for those seeking to optimize their risk management. This model can be easily set up for an investor with a broker that provides access to a wide range of securities such as Freedom24, ensuring the ability to diversify their assets.
The importance of expert analyzes and investment recommendations
Risk management also requires good support. The use of analyst recommendations can prove to be decisive, but you still need to be able to navigate the teeming world of changing opinions, raising or lowering price targets from the many departments of the company, broker analysis and the management company in place. Freedom24’s Bloomberg-awarded analyst team provides weekly turnkey investment ideas with entry price, target, investment horizon, risk level and supporting arguments.
The importance of hedging strategies
A hedging strategy, called hedging, is a transaction aimed at limiting exposure to risk. Against exchange rate risk or the risk of a market correction, a very wide range of products can temporarily cover all or part of the portfolio: trackers (ETFs), warrants or even options. By paying a premium, an option allows you to hedge your stock investment against a perceived and temporary decline in prices over a given period. Economic solutions, this essential tool in risk management, can be traded at Freedom24, a broker offering options on US stocks at the lowest prices in the European Union.
We go further: structured products
Structured products are financial instruments that allow combining a hedging strategy in one transaction, while guaranteeing a return calculated according to a mathematical formula under predetermined conditions. Offered, designed and distributed by a financial intermediary, these products allow for combining several assets, dampening market shocks and at the same time allowing for the generation of a minimum return. In this way, they represent a valuable risk management tool. Innovative in design and construction, Freedom24 structured products perfectly solve this problem. In particular, an investor who wishes to supplement his stock portfolio with an investment instrument partially guaranteeing his capital in search of performance in the US market can, if necessary, opt for a structured product that combines a bond wrapper, an underlying asset such as the S&P500 index. and derivative product.
Choosing the right broker
An essential, but often overlooked, way to effectively manage the risks of investing in the stock market is simply choosing your broker. Among the main criteria to check when choosing your broker, apart from the naturally competitive fees:
- – Ergonomic application and reliable and efficient business interface.
- – A serious player with a solid background who owns traded securities.
- – Access to a wide range of products, themes and geographies for your investments.
Regulated player Freedom24 has a representative in France responsible for customer service in French and fully ticks all these boxes. This European broker allows trading around a million instruments (equities, trackers, futures, options, structured products, etc.) on the largest exchanges in America, Europe and Asia.
Conclusion
Of course, the investment strategy must be guided by the return objective. But this pursuit of performance is doomed to failure over time without rigorous implementation of risk management. This management must be thought out and adapted to be effective. For this, the initial selection of a good broker proves to be decisive in the sense that it enables access to suitable products and services: quality financial analyses, a wide range of products enabling the implementation of business strategies, assurance and optimization of risk management. For investors who want to manage their risks as efficiently as possible, this choice of broker is undoubtedly the first step!
This content was created in partnership with Freedom24. The editors of BFM Bourse were not involved in the production of this content.