The 3 biggest mistakes people make on RISK

[dozu888]

- the first one is very common, and is laid out in Justin Mamas book The Nature of Risk. People take too little information risk and too much price risk. In other words the 'need to know for sure'... I think most know what I am talking about... it's Mamas' idea anyway so read his book .... the next 2 are my own observations/theories:

- underestimating the opportunity cost... the so called YOLO - and therefore taking on low probability ventures when they are young.

Actually due to compounding, the correct way is to take high probability activities when you are young, and low probability when you are older.

so many people would go like I have saved up $25k, let me just try my hand at day trading, and if I blow the $25k I am only 25 years old it's no big deal.... WRONG!, it's a very big deal!... $25k at say age 20, if you just hold QQQ, becomes $200k in 18 years! and $1.6m in 45 years! in other words you have just blown your 'could be retirement portfolio' !

The logical thing to do is you should try day trading when you are 70 years old... you will get the same experience, but the cost is far lower.

in other words, when you are young you need to be conservative! not in the sense of putting money in bank CDs, but in the sense of following the proven path to wealth - climb the corp ladder to a director / VP position asap! or gather enough skill and become independent consultant ASAP! and buy a damn house, the most proven way to gather equity...every $10k less you make per year when you are 25-30, translates to 100's of $k when you are older.... once you are finally set, then you can fool around... the conventional wisdom has it ass backwards - 'I am young so I can take on more risk'.... NO!

- the need to be 'in control' - in a different thread I mentioned QQQ (again lol) and people asked what if it crashes like 1929... legit ask, nobody knows for sure... but - worrying about market crash, is, in a way, like worrying about a plane crash.

the death rate per 1000 traveler mile, is far lower for flying than driving, yet many worrying about plane crash and prefer driving because they have their hands on the steering.

applying to trading, even though the NDX has performed 12.5% since the day it was born in 1986 and has been virtually unbeatable by any pro managers, yet the amateur investors are worrying about what if the QQQ crashes, ignoring the fact that 95% of retail brokerage accounts are net losers, a failure rate far higher than the drive to the airport.

Good luck.

 

[nooby_mcnoob]

- the first one is very common, and is laid out in Justin Mamas book The Nature of Risk. People take too little information risk and too much price risk. In other words the 'need to know for sure'... I think most know what I am talking about... it's Mamas' idea anyway so read his book .... the next 2 are my own observations/theories:

- underestimating the opportunity cost... the so called YOLO - and therefore taking on low probability ventures when they are young.

Actually due to compounding, the correct way is to take high probability activities when you are young, and low probability when you are older.

so many people would go like I have saved up $25k, let me just try my hand at day trading, and if I blow the $25k I am only 25 years old it's no big deal.... WRONG!, it's a very big deal!... $25k at say age 20, if you just hold QQQ, becomes $200k in 18 years! and $1.6m in 45 years! in other words you have just blown your 'could be retirement portfolio' !

The logical thing to do is you should try day trading when you are 70 years old... you will get the same experience, but the cost is far lower.

in other words, when you are young you need to be conservative! not in the sense of putting money in bank CDs, but in the sense of following the proven path to wealth - climb the corp ladder to a director / VP position asap! or gather enough skill and become independent consultant ASAP! and buy a damn house, the most proven way to gather equity...every $10k less you make per year when you are 25-30, translates to 100's of $k when you are older.... once you are finally set, then you can fool around... the conventional wisdom has it ass backwards - 'I am young so I can take on more risk'.... NO!

- the need to be 'in control' - in a different thread I mentioned QQQ (again lol) and people asked what if it crashes like 1929... legit ask, nobody knows for sure... but - worrying about market crash, is, in a way, like worrying about a plane crash.

the death rate per 1000 traveler mile, is far lower for flying than driving, yet many worrying about plane crash and prefer driving because they have their hands on the steering.

applying to trading, even though the NDX has performed 12.5% since the day it was born in 1986 and has been virtually unbeatable by any pro managers, yet the amateur investors are worrying about what if the QQQ crashes, ignoring the fact that 95% of retail brokerage accounts are net losers, a failure rate far higher than the drive to the airport.

Good luck.

Good post

 

[ElCubano]

Sounds good. Taking big risks while young will or may allow you time to recoup, regroup and restart. Not so much when you are 70, where a loss may never be recouped by future cash income/flow. That being said, this topic was discussed before many years ago and the poster laid it out the same way. More risk averse when young to risk taker when older. The reason as you laid out above is time is on your side. Peace.

Think about starting to work out of high school and putting your college funds to work from the start while not accumulating debt. You’d probably fair better lol.

 

[qlai]

so many people would go like I have saved up $25k, let me just try my hand at day trading, and if I blow the $25k I am only 25 years old it's no big deal.... WRONG!, it's a very big deal!... $25k at say age 20, if you just hold QQQ, becomes $200k in 18 years! and $1.6m in 45 years! in other words you have just blown your 'could be retirement portfolio' !

Who at 25 thinks how much they may or may not have in 18 years? Your compounding assumptions are backwards looking.
My opinion is the opposite ... Young people must take high risks while they have the advantage of time. It's like the tennis serve - you are going for the ace on the first one and if that doesn't work out, go for the sure thing. Doesn't mean to be reckless.
Being rich at 70 is not what young people should dream about.

 

[dozu888]

Who at 25 thinks how much they may or may not have in 18 years? Your compounding assumptions are backwards looking.
My opinion is the opposite ... Young people must take high risks while they have the advantage of time. It's like the tennis serve - you are going for the ace on the first one and if that doesn't work out, go for the sure thing. Doesn't mean to be reckless.
Being rich at 70 is not what young people should dream about.

ha I am a real good tennis player

if the first serve percentage is 5% (like the short term trading success rate), a pro player would definitely have to spin it in, otherwise he'd get killed having to serve all the seconds... in other words what the pro is looking for is the best point win% in his service games, which translates to my argument - go for the maximum probability of winning (including all the points when the first serve lands, or not), instead of the maximum winning when the first serve lands in.

no, being rich at 70 is not what I am advocating... from 25 to 70 is not quantum, it's a continuum where the earlier you lose a $, the bigger the loss when it translates to later in your life thru would-be compounding.

 

[maxinger]

3 biggest risks are :

- taking far too little risk
- taking far too much risk
- taking unnecessary risk

 

[helpme_please]

When you take big risks at 20 years old and lose everything, you lose thousands. It isn't so bad because you can still find a stable job and recover from the loss. When you take big risks at 70 years old and lose everything, you lose millions. To make matters worse, at that age, you're probably unemployable and most likely unable to recover from the loss.

When you take big risks at 70 and succeed, you don't have many years left to live and enjoy the success. When you take big risks at 20 and succeed, you have a lifetime ahead to enjoy the success.

Taking big risks when young and falling hard early speeds up the learning process. This speeds up the wealth creation process.

It is hard for me to agree with OP why it makes sense to take big risks when old instead of young.

 

[ElCubano]

Who at 25 thinks how much they may or may not have in 18 years? Your compounding assumptions are backwards looking.
My opinion is the opposite ... Young people must take high risks while they have the advantage of time. It's like the tennis serve - you are going for the ace on the first one and if that doesn't work out, go for the sure thing. Doesn't mean to be reckless.
Being rich at 70 is not what young people should dream about.

Yes and no. 70 was just a number he may have pulled out of his a**. Lol. Think the logic through and the risk component to it. Slow and steady may fair better in the long run. We also have to take into account the mindset of a 25 yr old.

 

[dozu888]

Sounds good. Taking big risks while young will or may allow you time to recoup, regroup and restart. Not so much when you are 70, where a loss may never be recouped by future cash income/flow. That being said, this topic was discussed before many years ago and the poster laid it out the same way. More risk averse when young to risk taker when older. The reason as you laid out above is time is on your side. Peace.

Think about starting to work out of high school and putting your college funds to work from the start while not accumulating debt. You’d probably fair better lol.

darn I actually remember that high school discussion and I was in it... arguing that if you have to pay $100k out of pocket for the 4 year college degree you probably come out ahead with just a high school diploma!

not to mention nowadays you can still get that BS/BA some other way - like some free online colleges, or community college for 2 years than transfer, or working after high school and let your boss pay for the college tuition.... that $100k in qqq is already THE retirement portfolio!

 

[fan27]

in other words, when you are young you need to be conservative! not in the sense of putting money in bank CDs, but in the sense of following the proven path to wealth - climb the corp ladder to a director / VP position asap! or gather enough skill and become independent consultant ASAP! and buy a damn house, the most proven way to gather equity...every $10k less you make per year when you are 25-30, translates to 100's of $k when you are older.... once you are finally set, then you can fool around... the conventional wisdom has it ass backwards - 'I am young so I can take on more risk'.... NO!

From a pure probability and compounding perspective, what you say makes sense. What you ignore though is that younger people often don't have families depending on them and can afford to take on more risk. Plus, some people leave "safe" corporate gigs to start their own companies and the payoff is huge. A former co-worker left the company to work on a startup which later was sold to meetup.com. He did quite well and is currently raising a family in NYC. Granted, the example I gave is different than the typical day trader wanna-be as even if the startup fails, the individual can usually parlay that into a very high paying tech job. I think the real tragedy is the wanna be day trader who toils away for years at the venture and barely has a chance to make any real money.