How to Manage Risk and Volatility: Stop-Losses, Diversification, Portfolio Balancing
The year 2025 has been a roller coaster ride for many investors. The shake was more for those who just invested in a few stocks.
As per the report on Moneycontrol, retail buyers in India pulled out the investments, with net purchases reducing to ₹7,400 crore. In the meantime, with Indian stocks selling off, the global markets lost nearly a trillion dollars in value.
These results and statistics show that a big drop in the stock market can cause major losses in the case of no smart controls. It makes risk management essential to safeguard your investment in unfavorable market conditions.
Use Stop-Loss Orders
A stop-loss is an automated order that sells your stock if the price gets too low, even below the set level. Consider this as your safety net to avoid losses and unplanned decisions. In case of a market fall, the stop-loss is there to handle it on your behalf.
For example, if you buy a stock at ₹100 with a stop-loss set at ₹92, the system will automatically sell it as the price reaches ₹92.
Choose the Right Stop-Loss Method
| Stop Type | Parameter | How It Works | When It Helps |
| Fixed Stop | Easy | Set one number below your entry | Simple trades with clear levels |
| Percentage Stop | Keeps loss in control | Exit after a set % drop | Positions with known risk limits |
| Trailing Stop | Protects Profits | Moves up as price rises | Long moves where you want to lock gains |
Set Position Size Before Entering
Often, traders start purchasing the stock without thinking about the losses. It puts their investment at risk and can even destroy the portfolio. It is good to fix the maximum risk before entering the market. A smart rule is to risk only 1% to 2% of your total money on any single trade.
For example, if you have 6 lakhs rupees, risking 1% means you limit your losses to ₹6,000 per trade. Once the price stop-loss hits, your total loss will be ₹6,000, which you’ve already risked.
Diversify Across Asset Types
| Asset Type | What It Adds |
| Stocks | Growth potential |
| Bonds | Stability |
| Commodities | Inflation protection |
| ETFs | Easy diversification |
Diversify Within Each Category
Avoid putting all your investments in one sector, but diversify them across tech, banking, energy, etc. This avoids the problem in one area, impacting the entire range of investments.
For example, splitting your money across multiple sectors ensures that total loss remains less even in the case of one sector struggling.
Avoid Too Many Holdings
Diversification in your investments is good, but over-diversification can be bad, too. It makes the tracking harder and lowers the overall profits as well. A smaller and organized mix of investments performs way better than a long and confusing list.
Rebalance Your Portfolio Regularly
Rebalancing your investment portfolio is essential because of market shifts. Let’s suppose one of the stocks is growing very fast. In that case, you need to buy more slower bonds.
For example, if your plan includes 60% stocks and 40% bonds, and the stock jumps to 70%, you need to sell some stocks and buy bonds.
Rebalance After High Volatility
You should rebalance your stock portfolio after sharp and quick swings in the market. Sudden big events in the market can change the original proportion of your investments, leaving you with more risk exposure. In such cases, a quick adjustment of your investments is needed to restore the risk level.
Match Your Risk Level to Your Goals
Always try to match the investment risk with the goals. Go for the safer options for short-term needs and the more risky ones for long-term objectives. Keep your decisions based on the timeline and stress level. Avoid copying other people’s strategies in the stock market.
Track Volatility of Each Holding
Always keep a keen eye on the investment movement and decide on a stop-loss accordingly. Assets with high volatility require a wider stop-loss and smaller purchase size. On the other hand, the assets with low volatility can have tighter stop losses.
Conclusion
Risk in stock market investment is something guaranteed for everyone. However, it can be managed well with proper information and actions. Set a smart exit plan and spread the investment in a balanced portfolio to stay calm even during market chaos.
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This analysis is for informational purposes only. Please consult a SEBI-registered financial advisor before investing.
– Chandan Pathak
Equity Research Analyst, StockYaari