Risk Management for Investors

Risk management is not a single tool. It’s a set of habits that limit the damage from bad outcomes.

1) Position Sizing

If one position is large enough, one mistake can dominate your results.

Simple rules of thumb:

• Avoid letting a single stock become an outsized percentage of the portfolio
• Size positions smaller when uncertainty is higher

2) Diversification

Diversification reduces the impact of company-specific bad news.

Diversify across:

• Companies
• Sectors
• Styles (growth/value)
• Asset classes (stocks/bonds/cash)

3) Drawdowns and Time Horizon

Drawdowns are inevitable. The question is whether your plan can tolerate them.

• If you need the money soon, avoid high-risk allocations.
• If your horizon is long, volatility can be acceptable.

4) Rebalancing

Rebalancing keeps risk from drifting upward after winners run.

Two common approaches:

• Rebalance on a schedule (quarterly/annually)
• Rebalance when allocations drift beyond thresholds

Summary

Good risk management is boring. It’s about sizing, diversification, and rules that keep you from making your worst decisions at the worst time.