InvestorQ : Is it true that when trading, risk matters more than returns?
ananya Sing made post

Is it true that when trading, risk matters more than returns?

Shreya Karn answered.
3 years ago

One of the primary lessons you learn in the equity markets is that your primary focus should be on capital protection. If your capital is safe or you know your maximum loss then you always have another day to come back and fight it out in the market. Therefore, your investment strategy must be predicated on protecting your capital. By setting an upper limit of 25% for your rate sensitive exposure is intended to protect your capital in the event of a rise in interest rates. It does not matter how successful a certain part of your strategy has been. At any point of time some strategies are going to be successful and some are not. What matters here is whether as a portfolio you are able to outperform the equity indices by a decent margin or not. When you let success define your strategy, there are two risks. Firstly, you are vulnerable to the risk of over exposure to a particular theme and that increases your concentration risk. Secondly, in the process of chasing your past success you may be missing out on promising stocks off the future. By spreading your risk and maintain a clear investment strategy, you are more likely to be successful in long term investing.