Risk, portfolio and behaviour
How much can you lose, how do you spread it, and why do people do the opposite?
12 of 12 chapters published
Chapters
Beginner
- What risk actually meansNot how much a price wobbles. The risk that matters is permanent loss of capital, and not having the money when you need it — and the most common measure of risk is a measure of something else entirely.
- The risks you actually faceNine of them, and the ones people worry about are rarely the ones that do the damage. The market falling is survivable; losing your income, your health or your capital to a fraud is not.
- Insurance firstTerm cover and health cover before any investment, because they are the only products that pay out more than you put in exactly when you need it. And what you wrote on the proposal form decides whether the claim is paid.
- The emergency fundMoney kept somewhere dull so that a bad month does not force you to sell a good investment. It is the mechanism that converts market volatility from a risk into a non-event, and it earns a poor return on purpose.
Intermediate
- DiversificationSpreading money across things that do not fail together. It removes the risk you are not paid for and leaves the risk you are — which is why it is the only thing in investing that improves one side of the trade without costing the other.
- Correlation, and when it failsDiversification works because holdings do not move together. The problem is that the degree to which they do not is measured in calm markets and tends to collapse in the ones you built the portfolio for.
- ConcentrationMost large fortunes are made by concentration and most large losses come from it. The difference is whether you could survive being wrong — and the most dangerous concentration in Indian households is not in a portfolio at all.
- Drawdown and sequenceHow far a portfolio falls from its peak, and when the falls happen relative to your cash flows. The same average return produces very different outcomes depending on the order — and the order is the part nobody controls.
Advanced
- The behaviour gapThe difference between what a fund returned and what its investors received, caused entirely by when they bought and sold. It is the largest avoidable cost in investing and it does not appear on any statement.
- FraudsMoney taken rather than lost, with no recovery and no lesson about markets. SEBI publishes a list of nineteen do's and don'ts, and almost every fraud an Indian investor meets is caught by one of them.
- Capacity and toleranceHow much risk you can afford is a fact about your circumstances. How much you can stand is a fact about you. They are different numbers, and the right allocation is set by the smaller of the two.
- A risk planEleven chapters as one page you can actually use: insure the catastrophic, hold cash for the disruptive, match horizons, diversify what is uncompensated, and write down in advance what would make you sell.