Asymmetric Finance

Asymmetric Finance

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To Earn More Money, You Have To Think Independently
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To Earn More Money, You Have To Think Independently

How to optimize risk parity in your portfolio

Aug 31, 2022
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Asymmetric Finance
To Earn More Money, You Have To Think Independently
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To make more money in this world, you need to be an independent thinker, go against the grain and be correct because the consensus view already came with the whole lot.

You're going to be hopelessly, painfully wrong a lot of times, so learning to get it right is paramount to success.

The same applies with respect to success in business: you have to be an independent thinker who bets against the big picture, which means getting it wrong often.

Most people who come into the investment world do not think independently. They follow certain buy recommendations from one person or another and turn support into resistance.

What does this mean? Many people in the world are very infatuated. They are just as infatuated with their wife as they are with their neighbor. And although it is true that changing your mind and adapting is wise, the truth is that in the stock market, this type of people do not make money. Why?

Imagine buying shares of your favorite company or the one recommended by your neighbor (the husband of the one you like) because they do not stop falling and are cheap. You think that this is a support and that it is impossible that it can fall further.

However, it turns out that the price keeps falling and falling until the price pierces the support.

At that point, you stop trusting that company, or as in the case of the man in love with his wife, and you suddenly want to run out of there. Therefore, you say that the moment the price returns to its initial price, you will get out of the company.

What happened? What was once support now becomes resistance.

What usually happens? There is a factor in the stock market world (although it also affects many other things) called momentum. And generally, when this momentum is negative, it tends to remain so.

If there is one thing we want to convey with this newsletter, it is precisely this. We must be critical about where we put our money. For this, two things are tremendously important before you start buying any type of asset:

  • Know when you are going to buy

  • Know when you are going to sell

Often, being clear about these two things is much more important than why you are buying. There will be many purists who will surely deny it. But if there is one thing we are totally convinced of, it is that investment theses are there to be destroyed. Moreover, these criteria are (in many cases) totally subjective.

However, when we do the two previous steps, we are sure there will be no bias during the investment. For example, I am going to buy index funds doing DCA, and I am not going to sell until January 1, 2030. What happens if the indexes fall by 30% tomorrow? Nothing, I keep buying. In 2030 you will thank us.

Another critical consideration that we never tire of repeating (besides being critical about investing) is that one can never be sure of anything. There are always risks that can seriously affect our portfolio. Even in those movements that seem safer, so it is always good to take for granted that there will be some loss. This can only be solved by having a portfolio with risk parity. Or as we call it, an asymmetric portfolio.

What is risk parity, and how to optimize it in our portfolio?

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