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As an investor, you should be aware of the asymmetric risk-reward characteristics offered by the stock market. Why? They can offer you greater investment peace of mind.READ THE ARTICLE
Here are five key implications to consider:
📌 Limited downside: When you own stocks outright, your potential loss is limited to the sum you invested. However, if you engage in short selling, options trading or use margin debt, a bad bet could threaten your entire portfolio. This highlights the importance of diversifying your investments to mitigate the risk of individual stocks becoming worthless.
📌 Unlimited upside: While stocks can potentially lose 100 percent of their value, they can also climb far beyond 100 percent. However, it's important to recognize that eventually, growth will slow down.
📌 Skewness: The stock market's annual gains are often driven by a minority of stocks that achieve substantial growth. These high-performing stocks have a significant impact on market averages, while a majority of stocks may deliver market-lagging results.
📌 Global market recovery: Although individual companies or national markets may lose all value, a globally diversified portfolio of stocks is likely to recover and reach new highs over time.
📌 There’s no ceiling on potential gain: It's important not to underweight stocks, as doing so could mean missing out on significant returns.
You can’t underweight or overweight your allocation to equities, individually or as a percentage of net worth. Finding the right balance for you will be key to your long-term financial success.