Chapter 8 of 10All chapters
Chapter 8 of 10
Reducing risk deliberately
What it costs.
Methods
Holding safer assets, diversifying, hedging with derivatives, or simply investing less. Each reduces expected return, insurance costs money, and that is the trade.
- A hedge that is free is usually not a hedge.
- Reducing position size is the simplest risk control and the most underused.
Leverage
Borrowing to invest multiplies both directions and introduces forced selling. Many otherwise sound strategies have failed purely because leverage removed the ability to wait.