Friday, 8 August 2014

Get Comfortable with Taking Risk

When my Dada was younger, he was an avid Rummy and Bridge player. He would play each week, sometimes making money and sometimes losing money. What I admired about him was that he was extremely comfortable with taking risk. Even when he lost money, he'd eagerly await the next chance to make it back.

When we trade or invest in the markets, we sometimes get nervous. Many of us are not comfortable with taking risk. I started that way, and over time I've become more comfortable with risk. Last time, we started on the topic of how to ensure that Markets don't keep you up at night.

And now we'll extend this and talk about risk in general. How do we get comfortable with taking risk? If you're the kind of person who gets stressed out whenever your trades lose money, then you're not comfortable with taking risk. The good news is that you can get comfortable with taking risk. What you need is a change in mindset.

From observing my Dada win and lose money playing cards, I learned the two ingredients needed to become comfortable with taking risk. He would apply these two principles himself, and now I do the same.

The first principle is to only risk what you can easily afford to lose. This means that if you lose that money, your standard of living doesn't change. It means that the amount you are risking is small enough that it makes little difference to you whether you win or lose. This is extremely important. If your risk is small, you won't be stressed out if you lose your money.

The primary benefit of risking a small amount is that you don't have any emotional reaction to losses. This ensures that you remain rational and continue to make smart trading decisions. When you are stressed out, you are likely to make bad trading decisions, and end up losing even more money. So don't get to this point.

The second principle is to understand that there is no reward without risk. Another way to put this is that risk is beneficial to you. Without risk, you get no reward. Rather than view risk as something to avoid, you should view risk as an opportunity. Risk is an opportunity to make potentially big rewards.

This applies when it comes to trading, but also other decisions in your life. When you decide to marry someone, or decide to take a new job, you are a taking a risk. But this is a good thing. If you don't take these risks, you will miss out on significant life events.

Getting comfortable with taking risk is all about having the right mindset. And if you want to get comfortable with taking risk, you need to apply these two things. First, only risk small amounts. Second, view risk as an opportunity for reward, rather than something to avoid.

Once you adopt this mindset, something amazing happens over time. As you continue to take risk, you start accumulating rewards. All of a sudden, you look forward to taking risks. You look forward to the prospect of rewards. You realize the biggest negative risk is that of inaction. And finally, you get comfortable with taking risk.

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