This blog post is in response to a comment by a reader, Temperament: click here.
With my limited knowledge of trading, I know that true blue traders must be emotionless. They cannot fall in love with anything. They should not hate anything either. They do what the charts tell them to do, when to long, when to short, when to take profit and when to cut loss. So, I don't think they truly hedge. Hedging to traders could mean having a looser cut loss so as not to be whipsawed, perhaps.
As for risk management, I am a poor example. By conventional wisdom, we should not have more than 10% (some would say 5%) of our money in any one counter. For me, I allow up to 40% of my money in a single counter sometimes.
For sure, we can and should reduce risks in investments but it is impossible to eliminate risks.
It is very interesting how some seasoned investors would tell me that what I do is very risky, having 40% of my money in a single counter but if they only invest in Singapore equities, they are also exposed to a single country risk and a single asset risk to boot. Are they truly diversifying and reducing risk by having only 5% of their money in any one counter?
Apparently, we have to diversify across asset classes and go global to truly manage risk. How many of us mass market retail investors can do that?
So, there are risks on different levels. What about unit trusts? There would be advocates of unit trusts which are supposedly less risky. Perhaps this makes the lower returns justifiable? OK, I am being cheeky here.
Some would then argue that if we know Asia is where growth is and if we believe in Singapore, why bother with other markets? I shall leave that question open.
At the end of the day, how much risk are we able to stomach depends on the individual. We just have to be better at what we do. If we can thrive in a higher risk environment with higher rewards, that is not such a bad thing, is it?