As you know investing is not just about making money but also about protecting it. The key to long-term success in the stock market is not how much you win when you're right but how much you lose when you're wrong.
Why Investment Risk Management Matters
This article explains the importance of managing investment risk. You will learn how to protect your portfolio from significant losses, ensuring steady growth and financial security.
The Asymmetric Maths of Compound Growth
A very important point, most investors have never thought of is losses hurt more than gains help your returns.
A 25% loss needs a 33% gain to break even, while a 50% loss needs a 100% gain to recover. This is why limiting losses is crucial.
The less you lose during downturns, the less you need to gain during upturns to succeed, and consistent performance over time leads to better long-term results.
Benefits of Limiting Losses
- Avoid Life-Changing Losses: Prevent significant setbacks that can derail your financial plans.
- Harness Asymmetric Maths: Use the power of compound growth to your advantage with low losses and steady gains.
- Simplify Your Strategy: You don't need spectacular returns to achieve your goals.
- Enhance Return Consistency: Improve performance across different economic conditions.
- Increase Safe Withdrawal Rates (SWR): Make it easier to meet your wealth goals in retirement.
- Less Stress: Losses, especially large losses, cause a lot of stress. If you keep losses low, you have a much higher chance of sticking to your investment strategy when things go wrong.
Why Conventional Advice Falls Short
As I am sure you have seen, traditional financial advice suggests passive investing, which means accepting market risks. This approach can lead to significant losses, violating the principles of compound growth.
The Reality of Market Risk
Market downturns are inevitable. Without risk management, your portfolio will face a 50% or greater loss at some point, severely impacting long-term growth and causing a lot of emotional pain. A single large loss can ruin decades of growth. When combined with expenses, inflation, and volatility, the effects are even worse.
The Flaw in Diversification
You may think asset diversification helps manage risk, but it isn't foolproof. During major market downturns, correlations between assets increase, reducing the effectiveness of diversification.
So, you must have another strategy to keep your losses low.
The Solution: Active Risk Management
To truly protect your investments, you must actively manage market risk. This approach is the opposite of conventional advice but is crucial for preventing life-changing losses.
Effective Tools for Risk Management
The only tools we have found that effectively keep losses low are:
- Look at what the indexes are doing: Stop buying if a market index falls below its 200-day simple moving average.
- Trailing Stop Losses: Use a 15% or 20% trailing stop loss on all individual positions to limit losses.
Click on the above links to find out exactly how to implement them in your portfolio.
Conclusion: Protect Your Portfolio with Smart Risk Management
- Avoid life-changing losses by actively managing risk.
- Use the power of compound growth with low losses and steady gains.
- Simplify your investment strategy to get consistent returns.
- Enhance your portfolio's performance across various economic conditions.
- Increase safe withdrawal rates for easier wealth goals in retirement.
Act Now Take Small Steps to Keep Your Losses Low
Don't wait for a significant loss to impact your financial future. Start managing your investment risks today.
In both our newsletters, Quant Value and the Shareholder Yield Letter we follow this exact system to keep losses low.
Here is the process we use to select ideas and manage risk:
This is how we select ideas for the Quant Value investment newsletter
How we find ideas for the Shareholder Yield investment newsletter
