How much to risk, how much you can lose and how to stay in the game
Intermediate · Risk · no code
Risk 1: Measuring risk
What standard deviation really measures and what it assumes without saying so, why the shape of a distribution matters more than its width and how negative skewness disguises the collection of a premium as talent, how a fluctuation differs from a permanent loss of capital and when volatility genuinely turns into risk, and why the same asset carries a different risk for two investors with different horizons and liquidity needs.
Risk 2: Position sizing
The decision almost nobody studies and that decides the outcome: why two people with the same signal end up in opposite places depending on how much they risk, what the Kelly criterion exactly is and why betting all of it is dangerous even when you are right, how to equalize risk instead of money when some assets move five times more than others, and why ten different positions can in reality be a single bet in disguise.
Risk 3: Drawdown and ruin
Why recovering from a fall demands far more than intuition promises, how a strategy with a real edge can still leave you without capital before reaching the end, what depth of drawdown you should expect from a legitimate system and why a track record without suffering ought to frighten you, and the problem that sinks more portfolios than any other: the distance between the drawdown a strategy can take and the drawdown the person running it can take.
Risk 4: Leverage
What borrowed money really multiplies and what it merely subtracts, why twice the exposure to a market that goes up and down returns considerably less than twice and sometimes less than nothing, where the leverage you never asked for lives — futures, a mortgage, short positions, indebted companies inside your own portfolio — and why forced liquidation is not a large loss but a risk of another nature altogether: the one that withdraws your ability to wait exactly when waiting was the only thing required.
Risk 5: Building the portfolio
Why thirty shares from the same index diversify far less than the statement suggests, when concentrating is a defensible decision and when it is simply carelessness with a good press, what rebalancing a portfolio genuinely gives you and what it genuinely costs you, and how you move from allocating money to allocating risk once you discover that a 10% position can contribute more volatility than a 40% one.
Risk 6: The limits of the tools
The level that looks for the seams in everything above: what value at risk exactly says and why it turns reassuring right before the disasters, how scenarios and stress testing are used to think about what is not in the data, why a correlation matrix estimated on a short history is mostly noise that optimizers amplify, and which four questions you ought to be able to answer about your own portfolio before moving on to the three levels that close the course.
Risk 7: The risk that is not in the prices
Why the screen price holds for one share and not for your whole position, and how the days of average volume you represent set the true limit on your size; where your money physically is when you believe you have it, what investor compensation schemes really cover and how your broker going under differs from the issuer of your product going under; the concentrations that appear in no portfolio because they are not assets, from a single intermediary to a salary correlated with what you hold; and the investor's own operational risk, from the email account that opens every door to the distance between what they think they have and what they have.
Risk 8: Horizon, contributions and withdrawals
The level that breaks the silent assumption behind the first six: why two portfolios with exactly the same average return end up in different places as soon as money goes in or out, how the risk of someone accumulating differs from the risk of someone drawing down and why a large fall at the start of withdrawal is the worst of all, where the four percent rule came from and why no fixed withdrawal figure deserves to be called safe, and what regular contributions genuinely protect against as against what is attributed to them out of habit rather than evidence.
Risk 9: A risk system of your own
The close of the course: why a limit decided in calm is worth something and the same limit rewritten in the middle of a fall is worth nothing, which four things are worth having in writing before you need them, what to review each month and what never to look at because watching more often only multiplies the noise without adding signal, how to tell cutting because the real risk has risen or the thesis has died from cutting because it hurts, and the symmetrical mistake of holding on out of pride and calling it discipline, ending with your risk system summed up on a single page of questions you ought to be able to answer about your own portfolio.