No matter how good you are with your TA or FA or both. You still must at all times protect your portfolio against Black Swan event that may happen and causing big losses to the portfolio. It is lot harder to recover from big losses in the portfolio.
In Joel Greenblatt's brilliant book, "You Can Be a Stock Market Genius", he provides the following statistics by owning the following number of stocks:
- 2 stocks eliminates 46% of non-market risk of just owning one stock
- 4 stocks eliminates 72% of the risk
- 8 stocks eliminates 81% of the risk
- 16 stocks eliminates 93% of the risk
- 32 stocks eliminates 96% of the risk
- 500 stocks eliminates 99% of the risk
My risk management rule is based on Investing Capital and not at Portfolio level so that the risk exposure is actually quite consistent and independent of the stock market conditions.
I will keep my risk exposure to not more than 5% of Investing Capital for any single stock and not more than 10% to a sector. For long-term holding for capital appreciation and dividend income, I would like to take back my investing capital ASAP and only leaving behind the profits to ride with the stock market i.e. Pillow Stocks Investing strategy.
"Think of Risks before Profits, then you are more likely to be safe over long run." - Createwealth8888
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Hi CW8888,
ReplyDeleteWell put:- "Think of Risks before Profits, then you are more likely to be safe over long run."
Here are some advice by B. G. & Dick Davis.
“The Essence of Investment Management is the Management of Risks, not the Management of returns”, Benjamin Graham.
“Therefore Proper Allocation of Assets and Entry Level are the 2 most crucial actions.
Nothing you can do is better to Control Risks and Generate profit,” Dick Davis.
But the trouble is sometime our emotions over-rule our IQ and most of the time when it happens because "success has gone into our head".(If it's greed then it will be worse.) That's when we let our guard down. At that moment, we think we are heroes or super smarties, though actually, we don't really know what we are doing.
Ha! Ha! Beware & Be careful.
Recently, do you have too much success?