Investment Trap #7
“Is controlling risk important?” Most investors would answer “Yes.” Yet many of those same investors do not have a clear understanding of how to measure the amount of risk in their portfolio.
And if you cannot measure the amount of risk, you cannot control it.
Most investors have not been given a meaningful way to compare and contrast the risk inherent in creating and managing differing mixes of assets in their portfolio. When the market drops, they are shocked at how dramatically their portfolio is affected. They had no idea they could lose so much because they were never given the statistical tools to understand the risk.
When faced with an unexpected loss, many investors find it difficult to face. In some cases, they will deny any real loss and defend their decisions. Like a gambler who brags about a big night of blackjack and forgets two losing nights on the craps table, some investors will selectively remember the “wins” and deny the “losses.” Psychologists call this behavior “hindsight bias.”
Remove the mystery surrounding the investment process by understanding the myths about investing.
Check out “Separating Myths from Truth.”
