The Single Greatest Life Lesson I've Learned From Markets

The single greatest life lesson I've learned from markets is that risks are not normally distributed.  The odds of very good and very bad outcomes are greater than they would be in a perfectly normally distributed world.  It's the presence of these "fat tails" that shape sound risk management.We have to take risk to earn reward, but we have to manage risk to stay in the game long enough to reap our reward.

What that means in practice is that, wherever possible, we reduce or eliminate our tail risk to prevent catastrophic outcomes.  A simple example would be purchasing insurance on our homes.  No one complains about money "wasted" on home insurance just because our houses don't burn down or blow away in a tornado.  Similarly, we insure ourselves for hospitalization and routine healthcare even if we're perfectly healthy at the time.

On the other hand, we want exposure to the fat positive tails wherever possible.  It's that asymmetric exposure to positive versus negative outcomes that characterizes good portfolio management.

Many years ago, I changed jobs because I perceived that the workplace was not being managed properly and would eventually suffer because of it.  The tail risk, I believed, was greater than usual and I didn't want to be out of a job before finding a new one.  The position I moved to was growing significantly and there was a positive tail probability of growing within that company.  I learned those career moves from my time in financial markets.

When news of the coronavirus first hit in mid-January--and online mentions began to skyrocket, especially overseas--we did not yet hit our all time highs in the U.S. stock market and such precautions as hand sanitizer, nitrile gloves, and N95 respirator masks were readily available.  At the time I took such precautions, I was told that I was "overreacting".  From a risk management perspective, however, I was purchasing insurance.  I learned that, too, from trading markets.

Now, given the poor job of testing at-risk populations for the virus in the U.S. and new CDC advice for vulnerable populations to stay at home as much as possible, I'm taking further precautions and reducing time spent in public places.  Again, I'm told I'm overreacting.  What I'm doing, however, is managing my life the way I manage my investment portfolio, prioritizing staying in the game in order to eventually win the game.

The greatest existence lesson I've discovered from markets is to first mitigate hazard, then aggressively pursue reward.

To be sure, there's a time to "go for it".  When I left a secure position at a medical school to work full-time with traders, it was quite a gamble.  I made sure I had a Plan B if the move to financial markets didn't work out and that allowed me to go all out to reap positive returns if things worked out well. Similarly, in the current market, there is going to be a monster opportunity in stocks once it starts to become clear that the virus situation is abating.  With Treasury rates driven to all-time lows and the lack of yield in fixed income instruments, companies with strong balance sheets and decent dividends will become the new bonds.  There is a risk in ignoring the left tail of negative outcomes, but there is also a risk in not pursuing right hand opportunity tails as they become more probable.

Good risk management is necessary for success, but not sufficient.  We also need good reward management.

The undertaking of the modern-day surroundings is that it calls for each.

Further Reading:

Mastering the Psychology of Big Declines

TraderFeed Home Page and Index

.

forex trading forex factory what is forex what is forex trading forex market forex scams forex brokers forex com forex market hours forex news forex trading app forex trading for beginners how to trade forex best forex broker forex charts forex signals is forex legit pips forex forex investment ig forex forex calendar forex trading strategies hdfc forex card login best forex trading platform forex brokers usa forex cargo forex demo account forex exchange forex patterns forex reddit forex trading scams how to start forex trading tradera forex what is forex trading and how does it work what is leverage in forex best forex broker in usa best forex trading app forex app forex compounding calculator forex currency forex factory calendar forex profit calculator forex tracking forex trading platforms forex vs stocks learn forex trading lot size forex no nonsense forex td ameritrade forex forex cargo tracking forex definition forex login forex meaning forex pip calculator forex ranks forex reviews forex time zone converter forex time zones forex trading for dummies forex trading hours forex trading reddit free forex signals iml forex is forex trading profitable what is spread in forex best time to trade forex forex calculator forex candlestick patterns forex chart patterns forex com login forex correlation pairs forex day trading forex economic calendar forex for beginners forex session times forex stock forex strategies forex trader salary forex trading meaning forex trading reviews is forex legal live forex charts scalping forex us30 forex what is forex market what time does the forex market open when does the forex market open divergence forex forex com review forex factory news forex for dummies forex hours forex indicators forex market times forex pyramid scheme forex quotes forex sessions forex trading course forex trading signals

Iklan Atas Artikel

Iklan Tengah Artikel 1

Iklan Tengah Artikel 2

Iklan Bawah Artikel