Understanding Risk - The Most Important Thing to Invest Series 4

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Starting this week, we'll start updating the “The Most Important Thing to Invest” series, which is also updated every Wednesday. I hope everyone will pay more attention! If there's anything you want to know, you can also leave a message in the comments section, and we'll do our best to provide you with the investment content you're interested in.

“The Most Important Thing to Invest” was evaluated by Buffett as “a rare and useful book”, and he read them both times himself. This book condenses the author's own investment ideas and personal experiences over the years, incorporates the opinions of several other well-known investment experts, and summarizes the most important matters of investment through reverse investment. This book is very practical. You must be patient when investing, can't eat hot tofu in a hurry, and always have a sense of risk prevention. I believe investors will benefit greatly from reading this book.

Investing is only about one thing: dealing with the future, no one can accurately predict the future, so risk is unavoidable. Learning to manage risk is an essential element of investing. If we can find enough rising investments, then that means we are on the right path. But our success won't last long if we don't properly address the risks. The first step is understanding the risk, and the second step is identifying the risk. Finally, risk control.

Why is risk assessment an essential element in the investment process?

First, risk is a bad thing; most people want to avoid or minimize risk. When considering an investment, investors must determine the risk of the investment and their tolerance for absolute risk.

Second, when considering an investment, investment decisions should take risk as well as potential benefits into account. Investors must be lured into taking additional risks with higher expected returns; in other words, expected returns must match the risks.

Third, it is important to understand the concept of risk-adjusted returns. Through the relationship between risk and benefit, it is an upward “capital market line”, indicating a positive correlation between risk and return.