1/ Risk is the possibility of losing money in an investment. We can manage risk in our investments once we understand what it is and what kinds of risk there is around investing. Often just understanding the
risks helps people better understand how they want to invest.
risks helps people better understand how they want to invest.
2/ I always use an expression of, “Manage the risks, and the rewards will take care of themselves”. I think I adapted this from something Warren Buffet once said. No truer words have been spoken. You can't make money unless you understand all the risks and how to mitigate them.
3/ You can't make money if you lose everything in one very speculative investment that fails.
4/ How much risk you are willing to take comes down to two factors. The first is your personal tolerance
for risk. Some people, like me, can put all their money in a bunch of risky speculative biotech companies and sleep like a baby.
for risk. Some people, like me, can put all their money in a bunch of risky speculative biotech companies and sleep like a baby.
5/ Other people get all nervous and can't sleep a wink if their portfolio goes even slightly into the red. I know a lot of people who say they can tolerate a ton of risk, but they freak out whenever something goes wrong with any of their companies.
6/ You got to honestly know how much risk you are comfortable with.
7/ You should never take any more risk than is necessary to achieve your long term goals. The market
averages 8% a year over the long term. If you need more than that to reach your retirement goals, then
you might need more risk.
averages 8% a year over the long term. If you need more than that to reach your retirement goals, then
you might need more risk.
8/ If you don't, then you can safely put your money into a low cost index fund and kick back. The amount of risk you want to assume depends on how much risk you can tolerate and how much risk you need to assume to meet your goals.
9/ The higher the risk you take in investing the
bigger the reward, but so is the bigger risk of losing all your money. I see so many investors focus only
on the rewards and never the risks.
bigger the reward, but so is the bigger risk of losing all your money. I see so many investors focus only
on the rewards and never the risks.
10/ Market risk always exists. Corrections and crashes happen all the time in the market. They can come
from economic forces like a recession or geopolitical forces like an earthquake, pandemic or war.
from economic forces like a recession or geopolitical forces like an earthquake, pandemic or war.
11/ You can't control them, and you don't know when they are going to strike. In the market we call them the
Black Swan events. There are two main ways to protect yourself from the overall market risk.
Black Swan events. There are two main ways to protect yourself from the overall market risk.
12/ The first is you can hedge yourself. I have friends that sell covered calls or other options strategies to protect their investment in stocks from market risk.
13/ The other is just to raise cash into big rallies for the market and buy back positions into the big crash or correction. That is my strategy. I tend to fade the rallies slowly as the stocks move higher. Then I slowly buy back my positions into a sell-off.
14/ The other major risk is company specific risks. Anyone who has been in biotech for 5 seconds knows
these all too well. They often come in the form of clinical failures, but there are many types of
company risks.
these all too well. They often come in the form of clinical failures, but there are many types of
company risks.
15/ The biggest one is the risk of a poor management team. A poor management team can turn your investment life into a humbling experience. Taking a discovery stage biotech from start to commercial takes many important skills for a management team.
16/ Many of them are not up to that task. There are risks of patents, competition, obsolescence, failure to find funding, manufacturing and so many more.
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