1. Diversify into new industries
Legendary investor Warren Buffett has often talked about the value of sticking to your core circle of competence. However, his advice doesn’t imply that you shouldn’t try to expand your circle of competence.
Taking the time to learn about a new emerging industry or speaking with experts in a field that you have no experience in could give you valuable insights you need to at least understand new sectors of the economy.
Over time, as you build familiarity with new sectors you could diversify your portfolio.
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Learn More2. Calculate the downside risk
Every investment opportunity comes with upside and downside risks, but savvy investors tend to focus on the opportunities where the risk-reward ratio is heavily skewed.
For instance, if you spend a year trying to create a new product the worst-case scenario is that the product fails and you’ve lost 12 months of your time and effort. But the best-case scenario is that the product is a hit and delivers passive income for you for several years.
Similarly, the worst-case scenario for many companies is that they go bankrupt and investors lose 100% of their investment, but the best-case scenario is that their product or service grows exponentially and delivers multibagger returns for investors.
Focusing on these lopsided opportunities is the key to taking calculated risks.
3. Take small positions
Another way to limit your downside is to limit the size of your position. For instance, investment giant Blackrock recently suggested that a 2% allocation to Bitcoin could be justified given the risk-reward ratio.
If Bitcoin fails, you only lose 2% of your portfolio, which is negligible. But if it manages to displace gold as a reserve asset, as some expect, the upside could be immense.
This approach can also be justified for other high-risk, high-reward assets such as tech startups, emerging market stocks and small-cap stocks. With limited exposure to these volatile assets, you could keep a toehold in the most exciting parts of the economy (without risking losing an arm and leg in the market).
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