Risk is an opportunity or a hazard - take our choice

Generally defined as a hazard, danger or peril, the notion of risk, when viewed in the context of investment, can take on varying meanings. Indeed, given the arbitrary nature of this subject, individual investors can struggle to ascertain what exactly is their appetite for risk.

Interestingly, while the English interpretation of risk generally has negative connotations, the Chinese definition emphasises the element of opportunity. As such, risk should be perceived as a choice rather than a fate, and the key challenge is not to take on a greater level than is required to generate the return that is desired.

One of the best ways to manage investments is to diversify, or spread risk, over a variety of investments. For example, specific events can have a dual implication for equities, so what may prove positive for one company may be negative for another.

This was made evident by the recent recovery in oil prices, which was considered of benefit to energy stocks such as BP Amoco while simultaneously hurting companies heavily dependent on oil, an example being British Airways.

It is only by applying a balanced approach in terms of geographic, sectoral and stock spread that the sensitivity of a portfolio to individual influences can be reduced.

While diversification is theoretically one of the most important aspects of portfolio management, this is far from the reality of Sharetrack investors, where the old "don't put all your eggs in one basket" saying has been somewhat ignored. Clearly, the likelihood of higher risk has been overshadowed by the possibility of blue-sky returns.

Indeed, three of the top five performing portfolios have had a profound concentration on just two or three stocks. Furthermore, defensive or low-risk companies, such as utilities and consumer goods, have failed to rank amongst the 20 most popular stocks, while, unsurprisingly, more aggressive plays such as Internet and telecommunications stocks feature prominently. Although this strategy may seem alluring, bear in mind that many Sharetrack investors attempting this approach have fallen victim to the short-term vagaries of the market (recall Glanbia, Elan, Pfizer).

EMC Corporation had a share split which became effective on June 1st. As a result, all holders of the stock will have their shareholding doubled, with the shares now trading at half the price.

Mark Donnelly is a portfolio manager in the Private Client Department of Goodbody Stockbrokers