November 5, 2018

The upside of protecting the downside

The trick in investing is not to lose money

That’s the most important thing. If you compound your money at 12% a year, you’re better off than investor who make 25% in one year and lose 20% next year, who have some great years and horrible losses in others. The losses will kill you. They ruin the compounding rate and compounding is the magic of investing.

Most investors give more attention on capturing upside while completely ignoring the importance of
protecting downside. The bigger the investment loss, the greater the gain required to break even.

High risk = high return is true for individual securities, but not for a portfolio. This is a common misconception among investors. Risk-Reward has a positive correlation, but it’s not perfect. Risky securities are diversifiable by lower-correlated or negative-correlated securities. By buying low-correlated securities to hedge your risky security, are you lowering your upside? No. You’re lowering your downside.

You can’t predict. You can Prepare

You don’t know when markets will fall so best way is to be prepared as if that fall comes tomorrow. I am penning down some easy ways to protect downside for your portfolio:


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