Investment has countless principles, but risk comes first.

Risk is an indispensable part of investment activities, and it has a significant impact on the safety of the principal and the investment returns.

For investors who are sensitive to risk and focus on risk control, they are always more likely to suffer less loss of principal compared to other investors.

In Buffett's investment principles, the first rule is: Never lose money, and the second rule is: Remember the first rule.

It can be seen that Buffett also emphasizes the importance of risk, so every investor must have a sense of risk.

What is risk?

Risk is the danger undertaken by the investment subject in order to achieve the investment goals, which may cause the loss of principal or bankruptcy.

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To put it simply, in the investment process, everything that may threaten the safety of the principal is risk.There are many common risks, such as:

① Market risk: Market fluctuations can affect the actual returns of investors, and even cause permanent loss of principal. (Common)

② Currency risk: Changes in exchange rates can affect the actual returns of investments.

③ Inflation risk: The risk of devaluation of principal due to excessive issuance of currency.

There are many types of risks, and any one of them can affect our principal, ultimately leading to losses.

Why do most investors lose money?

It is because they lack awareness of risk control, or even have no concept of risk at all. A large part of the reason for investment losses is due to this.

For example, there are many funds in the market, why do some funds have a high drawdown rate and some have a low drawdown rate? This is influenced by the fund manager's awareness and ability to control risks.

The first step in investing is to have a sense of risk, that is, to ensure the safety of the principal first, and then talk about how much money to make.Otherwise, the probability of losing the principal is extremely high.

Generally speaking, high risk corresponds to high returns, and low risk corresponds to low returns, this is a sure thing.

Because wanting high returns means that you need to take on higher risks, that is, things with high returns are often very volatile. The reverse is also true.

For example, bonds and stocks, bonds themselves have the attribute of low returns, so their liquidity and volatility are far less than that of stocks.

The reason why the returns of stocks are high is that their volatility is very high, because most people want high returns, so there are more people buying, so its liquidity is very large, and the risk is also high.

This is why the probability of losing money when buying stocks is higher than when buying bonds.

Defining the scope of risk

There is no set standard for the scope of risk, I believe everyone has a balance in their hearts. (Funds)The author defines the risk range as follows:

Maximum drawdown < 5% — Low risk

Maximum drawdown between 5% - 15% — Medium risk

Maximum drawdown between 15% - 30% — Medium-high risk

Maximum drawdown > 30% — Extremely high risk

Therefore, when choosing a fund, it is best to opt for those with a lower maximum drawdown rate, as the fund managers of these funds have a strong awareness of risk control. (The longer the observation period, the more meaningful it is)

Thus, compared to funds with a higher maximum drawdown rate, their risk is smaller, and the probability of the investor bearing the principal loss is also smaller.

SummaryIn summary, the role and impact of risk in investment are significant; it can directly relate to whether your investment returns and principal are safe.

Many people actually cannot withstand too much risk, such as feeling overwhelmed by a 10% loss. Therefore, for those with a low risk tolerance, it is best to choose investments that are inherently low-risk.

Risk is the first consideration in investing. An investor who lacks a concept and awareness of risk will find it difficult to consistently achieve high returns.

Thus, those who focus on risk management can go further on the path of investment!

Finally, what is the maximum probability of loss you can tolerate? Feel free to comment!

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