I discuss the importance of risk management so frequently that I'm sure some readers are tired of hearing about it. On the other hand, I get enough e-mails from readers who thank me for spending so much time on that topic.
When I write about risk, I'm looking at it from the point of view of taking care of a current position or portfolio. The goal is to be certain as you can be that no significant loss occurs, and that your long-term survival as an investor or trader is not threatened.
I just came across a blog post that takes a larger view of the importance of risk management. Larry Swedlow, writing for CBS's money watch, pointed out the obvious – but it's something that I have not previously discussed:
"How do you know when you have enough?"
How do you decide that earning additional money plays no significant role in your ability to live the life you want to live, but that losing some portion of your current net worth would play a negative role in your life?
If you have reached that point, why continue to play the game?
Please keep this idea in mind throughout your trading career. I know that successful people – not necessary only traders – continue to believe that more money is there to be earned (based on past performance), and it probably is. Winners tend to remain winners. But the truth is that any investment can turn sour. Any successful person can begin a cold streak. I'm not suggesting you play golf and ignore the world, but I am suggesting that if you approach that ' wealthy enough' level, that you scale back and be certain not to jeopardize your financial stability.
This hits home for me. After a spectacular year in 1981, I lost almost all of it in 1982 when I stubbornly refused to believe that the bear market had ended. I have no idea how or why I allowed that to happen.