Manage risk wisely, protect your wealth
Risk management is not about avoiding risk — it is about understanding and controlling it. The investors who survive market crashes are the ones who prepared before they happened.
Types of Investment Risk
| Risk Type | What It Is | Impact | How to Mitigate |
|---|---|---|---|
| Market Risk | Overall market declines | 🔴 High | Diversify, hold long-term, DCA |
| Inflation Risk | Purchasing power erosion | 🟡 Medium | Invest in stocks, real assets |
| Currency Risk | Exchange rate fluctuations | 🟡 Medium | Diversify geographically |
| Interest Rate Risk | Bond prices fall when rates rise | 🟡 Medium | Short-duration bonds, laddering |
| Concentration Risk | Too much in one asset | 🔴 High | Max 5% per position, use ETFs |
| Liquidity Risk | Cannot sell when needed | 🟡 Medium | Stick to liquid ETFs and large-caps |
| Behavioural Risk | Panic selling, FOMO buying | 🔴 High | Automate everything, don't check daily |
Position Sizing Rules
🎯 The Golden Rules
Never put more than 5% of your portfolio in a single stock. Limit speculative positions (crypto, options, meme stocks) to 5-10% of total portfolio. Your core ETF position should be 70-80% minimum.
| Portfolio Size | Max Per Stock (5%) | Max Speculative (10%) | Recommended # of Positions |
|---|---|---|---|
| €10,000 | €500 | €1,000 | 1-2 ETFs only |
| €50,000 | €2,500 | €5,000 | 2-3 ETFs + 5-10 stocks |
| €100,000 | €5,000 | €10,000 | 3-4 ETFs + 10-15 stocks |
| €500,000 | €25,000 | €50,000 | 4-5 ETFs + 15-25 stocks |
Building a Recession-Proof Portfolio
Hold 6-12 months expenses in cash
This prevents you from being forced to sell investments during a downturn to cover living expenses. The #1 reason people lose money in crashes.
Own defensive sectors
Healthcare, utilities, and consumer staples companies maintain dividends and profits during recessions. People still need medicine, electricity, and toothpaste.
Keep dry powder
Have 5-10% of your portfolio in cash or short-term bonds, ready to deploy when stocks go on sale. The best returns come from buying during fear.
Never stop your DCA
The worst thing you can do in a crash is stop investing. The shares you buy at the bottom will be your best performers. Increase DCA if you can.
Market Crashes — Historical Perspective
| Crash | Drop | Duration | Recovery Time | Next 5yr Return |
|---|---|---|---|---|
| 2020 COVID | -34% | 1 month | 5 months | +107% |
| 2008 Financial Crisis | -57% | 17 months | 4 years | +128% |
| 2000 Dot-com | -49% | 30 months | 7 years | +101% |
| 1987 Black Monday | -34% | 2 months | 2 years | +93% |
Every single crash in stock market history has been followed by a full recovery and new highs. The only people who permanently lost money were those who sold during the crash.
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