The only way to have no risk is to have all cash. But that’s risky too, because inflation and currency devaluation could kill you.
I’ve always wanted to write the definitive piece on risk management.
I’ve read a zillion pieces in learned journals about how banks and hedge funds use computers and huge teams to manage the risks of their trading — also called taking bets, or gambling.
I don’t know how well it works for them long-term. But I see a lot of disaster stories showing huge losses on trades where they guessed wrong.
The worst risk is losing all your money. No junk bond interest rate of 17% (or whatever) can compensate for 100% loss.
But it’s hard to predict. There are plenty of “safe” investments that suddenly go south when the economy tanks — e.g. 2008.
To my mind, there are four “strategies” for dealing with risk:
1. Don’t do stupid. Ask yourself: What could go wrong? What’s the worst? If you can think of some horrible outcomes, stay out.
2. Diversification is key. Don’t bet your house on one “sure”thing. It won’t be.
3. Try to only get into things you can get out of quickly. That means listed stocks.
4. Treat all “experts” as salespeople. Good advice for watching CNBC and other bubblevisions.
Getting out quickly may limit your losses. My inviolate stop loss rule does that. Getting out quickly limits the pain in your brain.
Festering losses can drive you nuts for years and years. When times were hot — 2005 and 2006 — I suckered myself into several funds managed by talented houses, including Goldman Sachs and Citigroup. They suffered badly after 2007. And I suffered badly. There was no market to sell my misery. So it prevailed. My misery. It festered.
The funds have since inched back. A little. If I’m lucky, they’ll pay what muni bonds used to pay (but without the tax benefits). Maybe 5%.
My biggest method of dealing with risk is having your own business. You may do stupid. But it’s your own stupid. There’s little more frustrating than watching some moron lose your money. There’s nothing you can do about it, since no one listens.
The original sales pitch on hot funds also seems to evaporate over time. Goldman lost its decent managers. And Citigroup sold its fund to someone else, called StepStone, who serendipitously seems to doing a pretty good job.
Add your comments on risk below in Comments. We will pursue this.
Harry Newton who’s playing tennis in a few minutes. I’ll have the real estate syndication emails out today.
harry – what about income producing real estate with no debt? especially like single or multi family housing because the rents roll/update frequently and the cost to acquire new tenants is (generally) not high compared with office/retail/industrial properties.
I agree…we own 3 condos in a 55+ community (where we live) where we get long term renters 5-10 years…they have no small children…usually single yet no wild parties and their rent is automatically sent direct from their bank account, after their Social Security check is deposited, using Bill Pay. Their rents are not astronomical, however, the initial investment is not usually that high either