Financial Blog

George Soros once said: “It’s not whether you are right or wrong is important, but how much money you make when you’re right and how much you lose when you’re wrong.” So in this article, I will share with you three golden rules on risk management for investors.

Golden Rule No 1 – Invest in your spare cash

The first rule in investing is to invest with money you do not have to be used for several years to come. I realize that a major reason investors lose money when they are forced to sell their investments at a price that undervalued because they needed money for their personal expenses. However, when you invest your extra money, you do not fear or need to sell in bad times.

Golden Rule No 2 – management of liquidity risk

During the period when the stock market is crashing, you do not want to end up holding the stock, instead want to make sure that you have “balls” enough to “shoot” when the market is weak. The worst that could happen is that when the stock market crash, you do not have money to buy. Warren Buffett once said: “Cash combined with courage in a crisis is priceless.” So never put all your money in investments. Instead, always make sure you have at least 20% of your net worth or 6 months of monthly expenses in cash or cash equivalents. Although cash is lousiest investment during the market correction, Cash is King!

Golden Rule No. 3 – No More Diversified

Warren Buffett says, “Diversification is a protection against ignorance.” However, note that Warren Buffett was investing in different types of investment as well. In an article I read, he invested to Silver. I do not believe in more diversification, but diversification of focus, because no matter how much the investment may seem, I can not get all my eggs in one basket. While it is important to diversify, be counterproductive if you’re more diversified type of investment is too much. You will soon find it difficult to study and monitor all.

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