Investment Series Risk Free Investment Methodology
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
Investment Series: Risk-Free Investment Methodology
Summary:
For centuries, humans have sought to define and measure risk. From the early work of mathematicians like Pascal to modern academic efforts, the pursuit to conquer risk has been relentless. Without a clear definition and measurement, creating risk-free financial markets remains elusive.Mathematics, particularly probability, opened new avenues for understanding risk. Since the 1660s, starting with John Graunt, probability studies have evolved and become foundational for insurance and financial sectors. However, probability's limitations were evident in events like the Great Depression and subsequent market crashes. It assumes outcomes are independent and random, relying on normal distribution, and cannot account for unforeseen events. Thus, past results often fail to predict future performance. Uncertainty is a key risk component, with Treasury securities viewed as low-risk due to their performance certainty.
Risk involves both outcome uncertainty and its consequences. For too long, risk focused on occurrence probability, neglecting consequences. Defining risk by potential catastrophic loss is crucial. Although life is inherently risky, we often accept risks due to their low catastrophic potential.
Risk perception varies. A 20% portfolio loss may be acceptable to some, but catastrophic to others. By identifying what constitutes a catastrophic loss, investors can use tools like Protective Put or Married Put strategies to safeguard portfolios. These strategies ensure losses remain below the defined catastrophic level, enhancing investment security.
Implementing stop-loss policies across portfolios limits potential losses. Convex portfolios, characterized by limited downside and unlimited upside potential, are vital in modern risk management. While predicting future events is impossible, ensuring potential losses don't reach catastrophic levels is achievable. With financial instruments like stock options, creating such portfolios is accessible to everyone.
Consider: What does a catastrophic loss mean to you?
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