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Managing your Exposure to Risk
Risk ≠ Reward
It is common for people to expose themselves to unnecessary risks when investing. The assumption is that this extra risk will result in higher returns.
-A THREAD-
Risk ≠ Reward
It is common for people to expose themselves to unnecessary risks when investing. The assumption is that this extra risk will result in higher returns.
-A THREAD-
Increasing risk can also impact to the downside. 
Idiosyncratic risk is a type of investment risk that can impact to an individual asset, asset class, or a specific group of asset types.
Idiosyncratic risk is nothing more than gambling.
Idiosyncratic risk is a type of investment risk that can impact to an individual asset, asset class, or a specific group of asset types.
Idiosyncratic risk is nothing more than gambling.
Risk should be managed, and idiosyncratic risks should be avoided. Especially over long periods of time, where these risks can swing wildly, both in and out of your favor.
A few Examples of idiosyncratic risks in the market include;
* Concentration Risk
* Sector Risk
* Management Risk
Broad market index funds/ETFs help eliminate these risks from wreaking havoc on your portfolio.
* Concentration Risk
* Sector Risk
* Management Risk
Broad market index funds/ETFs help eliminate these risks from wreaking havoc on your portfolio.
Concentration Risk:
Having a single, or few investment(s). Unable to diversify, resulting in increasing other risk factors.
<4% of stocks outperformed T-Bills from 1926-2015.
Picking the winners is hard. That is why 90% of pros cannot beat their benchmark index.
Having a single, or few investment(s). Unable to diversify, resulting in increasing other risk factors.
<4% of stocks outperformed T-Bills from 1926-2015.
Picking the winners is hard. That is why 90% of pros cannot beat their benchmark index.
Sector Risk:
Focusing and over-weighting a specific sector. If the over-weighted sector does poorly, so will the portfolio.
A large-scale event impacting an entire industry is unpredictable, so planning around them is not an option.
Focusing and over-weighting a specific sector. If the over-weighted sector does poorly, so will the portfolio.
A large-scale event impacting an entire industry is unpredictable, so planning around them is not an option.
Management Risk:
Ineffective, destructive, or underperforming management can cripple a thriving business.
As a retail investor you will not own enough stock to sway management decisions. You are at the mercy of not only the management now, but also future management changes.
Ineffective, destructive, or underperforming management can cripple a thriving business.
As a retail investor you will not own enough stock to sway management decisions. You are at the mercy of not only the management now, but also future management changes.
"The index fund is a sensible, serviceable method for obtaining the market's rate of return with absolutely no effort and minimal expense. Index funds eliminate the risks of individual stocks, market sectors and manager selection, leaving only stock market risk."
- John Bogle
- John Bogle
Understanding your risk tolerance is imperative.
You will never be without risk, and gaining the equity premium though market risk appears to be the most rational approach.
Do NOT treat investing like a game of roulette. It is better to own the casino, than be the gambler.
You will never be without risk, and gaining the equity premium though market risk appears to be the most rational approach.
Do NOT treat investing like a game of roulette. It is better to own the casino, than be the gambler.
