Risk you can live with
The right amount of risk is the amount you can hold through a bad year without selling.
One company, one rule
If one company is 20% of your money and it halves, you lose 10% of everything. Before buying, ask: if this halved, what share of my money would I lose? Many investors keep any single company small for that reason.
Set your limit before
Decide the biggest fall you could sit through while calm. Portfolio’s “How bumpy is it?” asks for it and compares it with a bad year for your mix. A limit chosen during a fall is usually the wrong one.
Time is a cushion
Money needed in ten years can wait for a recovery; money needed next year cannot. The same fund can be fine for one goal and wrong for another. Match each goal’s money to its date.
The sleep test
If a fall would keep you awake or make you sell, the risk is too high for you, whatever a table says. Lower risk you keep beats higher risk you abandon at the worst moment.
Key takeaways
- Size each holding by what its fall would cost the whole.
- Choose your fall limit while calm.
- Match each goal’s money to its date.