Tuesday, February 20, 2007

Risk is to your advantage

Hi Mr Tan,

Someone told me that you coin the term "Risk is to your advantage". Can you explain this concept?


My reply:

The global stockmarket goes in cycles. You have some good years and some bad years. Over a long period, the return is averages about 6% to 10% per annum.

If you hit a bad year, the prices may go down by up to 30% below the trend line. This is a bad time to sell. You should wait for the market to recover. It will usually take one or two years, but may be longer.

In a bullish year, the prices may go up 30% above the trend line. This is a good time to realise your gains. In this case, you can get a much better return than average. It is also all right to keep fully invested in a bull year, as it may go higher.

If you are investing your money for the long term, you can wait for the right time to realise your investment. This is how you can turn risk (or volatility in the price) to your advantage.

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