Be Careful What You Wish For

When it comes to managing risk, investors need to manage their expectations. Be realistic about the outcome you expect from an investment, and understand the consequences of this outcome not materialising.

- Simon Brown

As traders or investors, we are essentially managing risk and, typically, we focus on the risk of losing money.

But the risk in the markets is about far more than just losing money. I have written before that one of the great things about investing is that your downside risk is capped at 100%, as an investment can only go to zero. But the reward is unlimited, as a share’s price can rise to absolutely dizzying heights. If we keep this in mind, investing becomes much easier – even if there are a few dud shares along the way.

However, there is a lot more to investing than this – and there are risks beyond losing money. Nerina Visser, director at ETFs, once commented that risk is when the outcome is not as expected. This fundamentally changed how I view risk with my own investments.