To create wealth from investments, you need to let your investments compound.
To let compounding work and create exponential gains, you must stay in the game for a long period of time.
To stay in the game for long, you must not panic and withdraw during market downturns.
To ensure you do not panic during market crashes, you need to set the right expectations for your investments.
To set the right expectations, you must determine your risk appetite first.
To determine your risk appetite, you must be aware of the maximum downside you can bear on your portfolio in extreme scenarios without getting panicked.
This is my friends is the starting point – risk profiling before building a portfolio.
Your risk profile will determine your return expectations. And you should be content with your portfolio’s (expected) returns even if it’s not the highest.
That is the only way to ensure you stay in the game for long without interrupting compounding to help you create wealth.
As Morgan Housel puts it “Room for error often looks like a conservative hedge, but if it keeps you in the game it can pay for itself many times over.”
Originally posted on LinkedIn: www.linkedin.com/sumitduseja
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