Apprenticed Investor: Protect Your Backside
If you're going to manage your own investments, it is crucial to ensure that no one disaster results in utterly catastrophic losses. The goal is to protect yourself -- not only from outright frauds such as Enron, WorldCom, and Global Crossing -- but from the legitimate firms whose shares got shellacked.
In my opinion, managing risk and limiting losses are the most consequential -- and underappreciated -- aspect of investing. Loss limitation has a much greater impact on portfolio performance than either stock selection or market timing. How you manage the risk in your holdings will have a more profound bearing on financial success than your stock selection.
It's a shame the subject is not "sexy" enough to warrant greater attention in the financial media.
Capital LostEnron currently stands as the U.S.'s largest corporate bankruptcy in terms of lost value -- about $66 billion. But don't think it takes a combination of fraud, deregulation and complicity from the bean counters for disasters of this magnitude to strike equity holders.
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