Risk Management: The Most Important Skill Nobody Taught You

Dear Fellow Investor,

Last post, we explored different investment vehicles. But here's the truth: knowing what to buy is only half the battle. The other half? Knowing how to protect yourself when things don't go as planned.

Why Risk Management Matters

You know that feeling when you're up 50% on an investment and thinking about buying a yacht? Or when you're down 20% and contemplating selling everything to buy gold bars? That's exactly why we need risk management – to protect us from our own emotions.

The Three Golden Rules I Follow

1. Never Risk What You Can't Afford to Lose This sounds obvious, but it's shocking how many people ignore it. Before any investment, ask yourself: "If this goes to zero, will I still be okay?" If the answer isn't a clear "yes," you're risking too much.

2. Position Sizing Matters More Than Stock Picking Even the best investment idea can blow up your portfolio if you bet too much on it. Here's my personal approach (not financial advice – your situation may differ):

• No single stock position larger than 5% of my portfolio

• No single crypto position larger than 2%

• No single sector larger than 25%

3. Diversification Isn't Just a Buzzword Think of your portfolio like a pizza. You wouldn't make a pizza with just cheese (okay, maybe you would, but stay with me here). Different ingredients make it better. In investing terms:

• Mix different types of investments (stocks, bonds, etc.)

• Include different sectors (tech, healthcare, etc.)

• Consider different geographical regions

Real-World Risk Management Tools

Stop Losses Think of these as your investment seatbelts. They automatically sell when an investment drops below a certain price. I set mine at:

• 20-25% for stable, large companies

• 15-20% for more volatile stocks

• 30-35% for crypto (yes, that wide)

Note: These are my personal guidelines based on my risk tolerance. Your numbers might (and probably should) be different.

Dollar-Cost Averaging Instead of diving in all at once, spread your purchases over time. It's like dipping your toes in the water before jumping in. This helps reduce the risk of buying at the absolute worst time.

The Biggest Risk of All

Want to know the risk that's killed more portfolios than anything else? It's not picking the wrong stock or missing the next big thing. It's overconfidence. Every time I've lost significant money, it's because I thought I was smarter than the market.

What's Next?

Next post, we'll explore how to build a research process that helps you make better investment decisions. Until then, take a hard look at your portfolio and ask yourself: "Am I really managing risk, or just hoping things work out?"

Keep ascending,

Cash

Disclaimer: This newsletter provides educational and informational content only. Nothing in this newsletter should be considered investment advice. All investment decisions carry risk, including the risk of losing some or all of your investment. Always do your own research and consider consulting with a qualified financial advisor before making any investment decisions.