CHAPTER 3

The Third Essential: Understand and Control Risk

The era where taking greater risks almost always got you greater gains is history. It died when the great secular bull market ended. In this new era, the importance of risk management in investing is vastly increased.

So even though the subject of controlling risk overlaps with asset allocation and diversification, managing risk is so important and has such unique aspects that, I believe, it warrants its own discussion.

The goal of this book is not to achieve the greatest gains; it is to achieve the greatest risk-adjusted gains.

Some losses are inevitable when you're investing. So, let's concentrate on avoiding an unaffordable loss, no matter how unlikely the circumstance.