Strategy Video: Matching Confidence to Risk for Better Returns
• It is conventional wisdom among retail investors that it is better to limit exposure and 'diversify'
• However, the approach some of the largest and most storied money managers take contradicts that view
• Probability dictates whether we should take a trade or not, should it also factor into our trade size?
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Do the top performing hedge funds and money managers have well-diversified portfolios or 'concentrated bets' in strong investments? Typically, we are coached to minimize risk as much as possible because we never know for certain what the market will do. A mechanical approach, diversified holdings (on a trade, market, theme basis) and limited exposure per trade confer clear advantages in a world of probabilities. For new and novice traders, that is particularly important to compensate for a lack of experience, robust strategy and capacity to mute emotions. However, there is a downside to watered down risks in potentially capped gains. What can we do to increase the return threshold of our trading without 'betting the farm' on each foray into the market? We discuss that in today's Strategy Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.