Recently, I have spent a lot of time conducting detailed business planning. The abundance of resources in the world often leaves people feeling overwhelmed. Therefore, I aim to help everyone here learn the most relevant knowledge in the least amount of time.
Risk management
Risk management is the first lesson in investing. Many financial institutions and individuals have suffered losses in the past and present due to improper risk management. Mastering the basics of risk control is essentially winning against the majority. Here, I will briefly introduce various terms and have the opportunity to provide detailed explanations of related knowledge in the future.
Risk premium
Risk premium refers to the expectation that investors have of receiving higher returns to compensate for the associated risks. This also explains why we often hear the phrase "high risk, high return." If a product claims to be risk-free but offers high returns, you should start suspecting it might be a scam...
Risk capacity
Risk capacity is influenced by factors such as age, investment time horizon, and personal financial situation. Typically, young people have longer investment horizons, which means that even in the event of losses, they have more time to wait for opportunities to recover.
For beginners, I would suggest the following points:
Idle funds: Use funds that you won't need in the short term for investment. If you encounter difficulties and are forced to sell positions at a loss, you won't have the opportunity to recover if those funds are unavailable.
Avoid using leverage: Once you use leverage, if the market moves against your expectations, you will face substantial losses. These losses may not be resolved in the short term and could result in an inability to repay loans or facing margin call requirements which will greatly impact your life.
Portfolio diversification: Diversify your investment portfolio by simultaneously holding various assets such as real estate, bonds, cash, or using a mix of stocks and bonds. In terms of industry diversification, avoid overly concentrating your investments in a single industry as industry cycles often rotate, and holding different industry sectors can achieve hedging effects. Geographic diversification is also essential to avoid crises caused by regional political risks, such as the US-China trade war or potential international conflicts. Additionally, you can consider diversification based on different expiration dates by making staggered purchases of stocks or choosing options and futures with different expiration dates.
Volatility:
Total return = Excess return (Alpha) + Systematic risk (Beta)
Alpha and Beta are usually calculated together to assess whether an investment portfolio performs well. A single value comparison doesn't have much significance.
Alpha
Alpha represents the additional return of an investment portfolio compared to the benchmark index and can measure whether an investment manager outperforms the overall market. If a portfolio has a positive Alpha, it indicates outperformance, while a negative Alpha suggests underperformance.
Beta
Beta represents the volatility of an investment portfolio compared to the market index, reflecting the coefficient of systemic risk. In the US stock market, it is often compared to the S&P 500 index.
Beta 1: Indicates higher volatility than the market.
Beta 1: Indicates lower volatility than the market.
Beta = 1: Indicates volatility equal to the market.
Insurance:
During the investment process, it is also important to ensure the risk of your investment broker and protect your investments from potential losses due to broker insolvency. Some common institutions include:
The Federal Deposit Insurance Corporation (FDIC):
In the US, banks that are members of the FDIC provide deposit insurance coverage of up to $250,000 per depositor, per account category. If you have deposits exceeding $250,000, you can open accounts in different banks to increase the coverage.
The Securities Investors Protection Corporation (SIPC):
SIPC provides protection up to $500,000 per customer account, including $250,000 for cash.
Central Deposit Insurance Corporation:
Taiwan also has a similar deposit insurance institution called the Central Deposit Insurance Corporation. They provide insurance coverage of up to NT$3 million per person for deposits. Amounts exceeding NT$3 million can be diversified across different banks for risk mitigation.
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