The stock market and other trading arenas are risk taking operations. At its core, we have to put capital at risk in order to produce a nice return. But it doesn’t always happen this way. Some bad news here or there might turn a nice profit into a minor loss or even worse, a devastating loss.
But we can take steps to sidestep the disastrous result but ‘curbing our enthusiasm’. I’m often told about the ‘next big thing’, the next Facebook or Microsoft to come out. ‘Bob, you have to get on board this one will be a rocket ship’. If I had a dollar for every pitch like this I would be a gazillionare. In any case, taking a step on the risk curve requires discipline, patience and willingness (and acceptance) to lose money.
Of those many pitches I receive from novice and professional investors, not a ONE ever says a word about loss. We often find ourselves with a strong bias only to win, with little regard for what may be on the other side – a crushing blow. How does one sidestep a devastating loss? We talk about it all the time – RISK MANAGEMENT. It’s quite okay and appropriate to take risks, but know what you’re putting up and expect the worst, hoping for the best.
One great way is to spread the risk, diversify your capital. They say ‘diversification is the only free lunch on Wall Street’. Indeed! Let’s say you were working on some crypto, want to put a certain amount of capital at work. Why not find 6-8 different digital currencies to invest in rather than just one. With that sort of diversification you gain exposure and will not limit yourself to a ‘sink or swim’ result (most of the time).
Imagine spreading the risk to several different cryptos some years ago. If you could afford the risk, then taking this investment probably would have paid off nicely. But putting all your eggs in one basket? Not a healthy or promising long term strategy.