Investing Made Simple by Uncle8888 (20)

Read? Investing Made Simple by Uncle8888 (19)

Control Risk is NOT a choice in Investing

How does Uncle8888 control his risks?

1. Limit investing capital exposure to any one stock.
2. Diversify but Don't Over-Diversify in any one sector.

Limit investing capital exposure to any one stock

When his account size was small, he limits it to at most 10% of his total investing capital to any one stock and less than 20% to any one sector. But now his account size is bigger he limits to 5% to any one stock and less than 10% in any one sector.

He was shocked when he heard some of his cyber friends are investing up to 40-60% of their investing capital into one stock by getting it cheaper and cheaper. Are they thinking that they are smarter than Mr. Market?

In investing, as part of good risk control management, we must learn to respect Mr. Market. He may be wrong over days or weeks; but he is seldom wrong over months. Over a longer term, Mr. Market is mostly Right; and if Mr Market indicates that you are wrong; you have to bravely accept it and move on.


Diversify but Don't Over-Diversify in any one sector.

Read? Portfolio Management - Portfolio Risk (2)

Uncle8888 believes most retail investors can easily understand that diversification is part of good risk control management. But, the idea of "don't over-diversify in any one sector" as part of risk control management may not be easily understood by retail investors; especially passive income investors in REITs. Often they will have a portfolio full of them - only different in "kind, shape or size". Don't believe him? Check it out yourself.

In the market, there will always be industry or sector risk when one particular investment thesis or theme related to that industry or sector may go sour in the future. When that happens; then every one in the same sector or industry will be hurt. It is only the magnitude or degree of fall in each stock in the sector that will differentiate them. But, it will certainly hit your portfolio badly. No doubt about it.

Have you seriously check through your portfolio and see how many % of your investing capital is in the same sector or industry?