When you think of leverage, what comes to mind? If you’re like most people, it’s some form of financial leverage – mortgage financing or debt financing – using other people’s money. You probably also think leverage is risky. But the truth is financial leverage is only one of six different types of leverage. Worse yet, it’s the most dangerous type of leverage because it increases risk as much as reward. The other five types of leverage can both decrease risk and increase reward… at the same time! So let’s pull these five other categories of leverage out of the shadows so you know how to multiply your wealth growth by taking less risk…
Risk Management Teaches You How To Make More By Risking Less On Your Investments
Financial risk management is how you play the defensive half of the investment game.
The purpose of risk management is to ensure that your investment losses never exceed acceptable boundaries by following disciplined practices including position sizing, diversification, valuation, loss prevention, due diligence, and exit strategies.
"The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning." - Charles Tremper
The reason risk management is essential - not optional - is because the amount you lose during the tough times determines how much you must make during the good times to meet your financial goals.
You must preserve your capital during difficult periods so that your offensive investment strategy has a larger base of capital to grow from when profitable times return.
For example, imagine a football team with such an effective defense (risk management strategy) that they never give up a first down to their opponent. This team will be very tough to beat because their offense doesn't have to score many points to win, and they will have most of the game to do it since the defense will spend so little time on the field.
The same is true with investing.
Financial risk management controls the investment game. It keeps the line of scrimmage near break even so the offense doesn't have to make up for losses when executing the next play.
It preserves capital when the opponent is pounding away at you so that the next touchdown is new profit rather than recovered losses.
Investing without risk management is like being a quarterback without a front line to protect you - eventually you will get slaughtered.
In other words, investment risk management is the secret to safe, consistent profits in any market condition.
Few investors understand that without a proper risk management plan you are literally one bad investment from the poor house. By managing risks you can reduce the odds of financial destruction to as close to zero as mathematically possible.
If your objective is financial security, then risk management should be your primary focus.
Remember, you can't make money when you are busy losing it.
To learn more about investment risk management please see the following articles...
- Due Diligence: Five "Must-Ask" Questions Before Making Any Investment - Learn what due diligence questions to ask so that you can avoid losing investments before they cost you money.
- How My Worst Investment Made Me Wealthy: How you manage investment losses will ultimately determine your profits. Learn which investment strategy makes the most of a bad situation.
- Four Stages To Consistently Profitable Investing: Discover which investing stage you are at now, and learn how you can jump to the next stage to become a more profitable investor.
Below you’ll find a listing of our most recent articles about investment risk management providing you with additional strategies and information so you can take the next step...
Bubbles, Bubbles Everywhere – How To Protect Yourself
All of the major markets are in extreme overvaluation territory creating extraordinary risk of loss. But this has been true for years so why the warning now? Discover the 4 symptoms that separate bubbles that burst from simple overvaluation, and find out how current market conditions stack up. Are we on the precipice of a collapse, or are we at the beginning of a sudden, final price acceleration? This complete analysis will give you all the facts and show you how to manage your risk of loss for the inevitable fall around the corner…
My Worst Investment Loss Exposed! (And the Gut-Wrenching Lessons Learned)
My first investment was a complete loss. I know that doesn’t make for ego pleasing, cocktail party conversation, but it’s the truth. In this article I reveal the whole story about how I lost 100% of my invested capital many years ago, and the investment mistakes I made to create this disastrous result. It’s proof that I didn’t begin as an investment genius and that anyone can develop the necessary skills. These lessons will short-cut your investment learning curve to improve performance…
12 Deadly Investment Mistakes You Must Avoid
Investment mistakes can cost you thousands of dollars and keep you from achieving your financial goals. Fortunately, you have two ways to learn how to avoid them – the first is expensive direct experience, and the second is vicariously through this article. What you’ll get in this article are the twelve most common (and expensive) investment mistakes that you’ll want to avoid along with tips, resources, and strategies showing you how to avoid them. Reading this article is the smart way to become a more profitable investor, without paying the price of direct experience. I hope it helps you reach your financial goals faster, and with less pain…
Four Stages To Consistently Profitable Investing
Do you want to learn how to become a consistently profitable investor? You must first determine which stage you’re at now, before you can advance to the next level. There is a natural progression in investment skill. Each builds on the next brick by brick. Discover the steps you must take to achieve consistent profits, and the best strategy for advancing to the next level…
Five “Must Ask” Due Diligence Questions Before Making Any Investment
An ounce of prevention is worth a pound of cure. Cliche, but true. And nowhere is it more true than investment due diligence. I’ve saved my coaching clients hundreds of thousands of dollars using the exact techniques taught in this article to easily detect bad deals before a single penny was lost. Use this article to help you avoid the next big investment mistake…
10 Commandments of Investment Strategy
Nothing is more financially dangerous than a million dollar investment portfolio managed with a thousand dollars worth of financial intelligence. The truth is your investment skills and knowledge will be reflected in your investment results. Use these 10 critical commandments to improve your investment performance so that you can enjoy greater investment confidence and financial security as a result…
Peer To Peer Lending Review – Dangers Revealed
In a world of zero percent interest rates peer to peer lending can look mighty tempting. Investor’s are starving for yield and P2P lending companies have risen to satisfy that need. Don’t be deceived. Look behind the emotional facade at default rates, unknown risks, operating difficulties and more so you can make a smart investment decision…
The Great Bond Bubble Is Now! What’s Next…
What does the bond market today have in common with the stock market in 1998-2000 and the real estate market in 2006-2007? They were all ridiculous bubbles that ended very badly for investors. This is not a prediction. It is simple risk vs. reward analysis based on valuations. It is something that can save your portfolio from massive losses when you understand how it works. Learn how…
What Is A Good Investment?
There is no such thing as an inherently good or bad investment. It is a myth. All assets can be good or bad investment given the right strategy, timing, or price. It is all about process – not product. Let’s see how this works…