The 9 Rules of Risk Management

Risk management is a tough topic for investors to comprehend (me included). The difficulty comes when you need to try to measure the risk of a particular stock. Wouldn’t it be helpful if there were some rules that could help guide an investor? As I was browsing through my local Chapters (like Barnes and Noble) and saw the book The Art of Asset Allocation the author referenced a series of nine rules that were developed by the RiskMetrics Group. This list is helpful not because it tells you exactly how to measure risk (the math is complex) but because it is a series of rules that give investors the confidence that they will need to be successful in today’s financial markets.

As an individual investor, I found this list helpful because it helped to really define what risk is and provided the rules to manage that risk by. At the end of the day, the reason I really like this list is that it really simplifies what investors need to do with risk in their dividend portfolios. Like many things with the stock market it is not rocket science. As long as we understand the fundamentals we will be in good shape to make informed decisions. Here are the nine rules:

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As you can see, they are not a specific recipe for evaluating risk. RiskMetrics sister site RiskGrades can help you with that. This list is common sense practices that every investor can apply to their own personal portfolio. For example, Show Discipline is a basic investment principle that will help a dividend investor manage the risk in their portfolio. Stick to your plan through thick and thin and you should come out ahead.

Risk is a tough topic to understand, but if we boil it down to these 9 rules then we will be that much further ahead.