🌰In a nutshell: Your portfolio returns grow in proportion to your capital. That means a critical loss to your capital can slow down your total return by a significant measure. Therefore, minimizing your loss is as important as maximizing return to maintain a steady portfolio growth to meet your investment goal.
Today, we are going to take a look at the importance of reducing risk in order to meet your financial goal within a given time frame.
Let’s take a look at the following graph. The information was taken from bogleheads.org.
The following shows gain and loss in percentage. What it shows is the following.
What you can see is that as your loss is getting greater, the percentage you need to recover will become even greater.
For instance, if your loss is about 10%, you only need to recover 11% of what is left after the loss to recover.
However, when your loss is about 30%, you would need to recover 43% of the remaining balance. If you lose 50% of your initial value, you need to recover 100% of what’s left in your account to strike an even. This means, you need to double the balance to recover the initial value.
This is actually obvious. If you originally started at 100 and lost 50, then you would have only 50. In order to recover 100, you would need to recover 50, which is doubling your balance.
Achieving 100% performance is quite a daunting task even in a bull market. In fact, it may take you a while to recover your starting point. It is not hard to imagine why this can really put behind your investment schedule. As such, building a portfolio with high tolerance to risk is just as important, if not more, as building a portfolio with a potentially high return. This becomes even more essential when the market is highly volatile and unpredictable, such as the crypto market. Therefore, you would need to do something to manage the magnitude of any loss in order to stay on track of meeting your financial goal.
Now that we understand how important it is to manage losses, what are the options we can take to manage the risk?
Here are six strategies that you can use to mitigate risks in the unpredictable and volatile asset markets.
As you can see, we have spoken a good deal on the idea of diversification. Up next, let’s talk about the concept of diversification and risk in detail.
Until then, how about checking your portfolio for free to see if your strategy is within the risk tolerance level you have originally designed!
“Percentage Gain And Loss – Bogleheads”. Bogleheads.Org, 2020, https://www.bogleheads.org/wiki/Percentage_gain_and_loss#cite_note-1.
“Six Strategies To Reduce Investment Risk | Barclays Smart Investor”. Barclays.Co.Uk, 2020, https://www.barclays.co.uk/smart-investor/news-and-research/investment-strategies/six-strategies-to-reduce-investment-risk/. Accessed 3 Mar 2020.
Check your crypto portfolio for its risk vs. rewards, and how they compare to other benchmark assets!