Back in my army days, every now and then someone would fall out of training.
Occasionally, it’s heat stroke, sometimes it’s a field injury, and other times, it’s because they have a flair for the “theatrics”.
It’s inevitable that there’ll be injuries from training. The risk of injuries can’t be completely avoided if you want a competent force. However, it can certainly be reduced.
It’s all about optimizing the risk-to-reward — reducing injuries while building a competent force.
This principle of balancing risk and reward didn’t just apply on the training field; it directly correlates with the investing world.
Seeking returns above the risk-free rate inherently involves some risk. However, recklessly pursuing high returns without a risk assessment is a recipe for disaster.
Managing risk is a wide topic, and when it comes to active investing, adhering to the following will help you do 90% of the lifting:
1. Steer clear of leverage.
2. Ensure adequate diversification in your portfolio.
3. Avoid low-quality, speculative stocks (or ‘shitcos’)
In fact, I’m going to let you in on a little secret…
Achieving high returns with minimal risk is attainable. Historical data suggest that generating 8% to 10% returns with almost negligible risk of loss is indeed possible.
Yes, you can have your cake and eat it too.
The Power of a Long Investment Horizon
The S&P 500 has never lost money over a 20-year time horizon.
And remember our discussion on “The Surprising Outcome for Timing the Stock Market Perfectly”? Even the worst-timed investments yielded a solid 10.6% annualized return over three decades.
Intelligent risk-taking in investing
So, how can you intelligently manage risk in the stock market?
1. Steer clear of leverage.
2. Maintain a long-term investment horizon.
3. Ensure adequate diversification in your portfolio.
4. Avoid low-quality, speculative stocks (or ‘shitcos’)
Understanding and managing risk is crucial for sustained success in investing. If you found these insights helpful, feel free to share this article with your friends.
Until next time,
Thomas