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Many people ask how can they retire from work earlier and be financially comfortable like me? Of course, I tell them investing for income ha...

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Risks, risks and risks.

Wednesday, December 7, 2011

This blog post is in response to a comment by a reader, Temperament: click here.

Hi Temperament,

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?


Temperament said...

Hi AK71,
To be emotionless in our buy/sell in the markets is next to impossible. Someone write if we really can do it we are as good as "dead body". By reading and interpreting the chart, (TA) they must have feelings, therefore already used "emotions". i tend to agree with this opinion, we really can not do anything without feelings or emotions consciously or sub-consciously.

AK71 said...

Hi Temperament,

Well, it is not really impossible. I do know of people who are really dispassionate about their buys and sells although they are perfectly normal human beings with emotions.

As for looking at charts with feelings, that is a big "no-no" for pure TA practitioners. Emotions would taint readings and bend TA to show what we want to see.

Anyway, I will let the pure TA practitioners comment on this, if they choose to. I am but a novice. I will stop here. :)

Finally, dead bodies are not just without emotions, they are without life. Quite a drastic difference. ;-p

Ray said...

From what I know about the Trader friends of mine, they do have strict stop loss limits. They go simply by the rule of keeping your losses small but let your wins run as much as possible. They operate
pretty emotionlessly from what I can see especially the seasoned ones.

The emotional ones are (from what I know) often newbie traders who quitted their day jobs or have retired. These traders psychologically pin their hopes on winning / not losing money in order to put meals on the table.

Hence I also hear that it is not advisable to not have a day job that help to pay your bills.

AK71 said...

Hi Ray,

Yes, I remember saying to a reader once before that if someone has to depend on money made from trading the market to put food on the table, then, it is best that this person finds proper employment instead. ;p

Ray said...

Well, they aspire to become the next who is apparently a happy trader who has finally attained nirvana.

AK71 said...

Hi Ray,

I was told that ascetics eat very little and are usually very skinny on their journey towards enlightenment. Perhaps, they do not need to have much food at all. ;p

Om Amitabha.


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