Roberto Anzellotti @IlMatematico: "YOU CAN’T CONTROL RETURNS. YOU..."

Italy

YOU CAN’T CONTROL RETURNS. YOU CAN CONTROL RISK. In this post, I will explain why investors cannot decide how much they will earn, but they can decide how much risk they are willing to take. Imagine driving a car. You cannot control the traffic, the weather or what other drivers will do. But you can choose your speed, keep a safe distance and take a route that suits your abilities. Investing works in much the same way. The wealth we accumulate mainly depends on three elements: ⏳ Time 💰 Savings 📈 Returns We can decide when to start investing and how much money to set aside. What we cannot decide is the return the market will give us. Many investors try to do the opposite and begin with a statement such as: “I want to earn 15% per year.” They then search for the stock, cryptocurrency or strategy that promises that result but the problem is that the market does not know or care about our targets. Prices depend on corporate earnings, inflation, interest rates, economic crises, political decisions and even the emotions of millions of investors. We can hope for a certain return, but we cannot order the market to deliver it. 🎛️ THE PORTFOLIO’S REAL CONTROL KNOB If we cannot control returns, what can we control? RISK We can choose how much to allocate to stocks, bonds, cash, commodities or cryptocurrencies. We can also prevent a single company from becoming an excessively large part of the portfolio. Risk is therefore not a minor detail. It is the foundation around which every portfolio should be built. 📚 THE LESSON FROM HARRY MARKOWITZ In 1952, Harry Markowitz laid the foundations of modern portfolio theory. His idea can be explained very simply: if two investments offer the same expected return, a rational investor should choose the less risky one. The objective is therefore not to achieve the highest possible return at any cost but it is to obtain the best possible return relative to the amount of risk taken. 🧺 WHY DIVERSIFICATION MATTERS Diversification means combining investments that are not closely correlated, so that the decline of one does not drag down the entire portfolio. True diversification does not come simply from owning many investments. It comes from holding assets that react differently to different economic conditions, reducing the portfolio’s overall risk. ⚠️ NOT ALL RISKS ARE THE SAME There are two main categories: #️⃣ Specific risk is linked to an individual company, sector or investment. A failed product, dishonest management or excessive debt can put a company in serious trouble. This type of risk can be reduced through diversification. #️⃣ Systematic risk, on the other hand, affects the entire market: • recessions; • inflation; • rising interest rates; • financial crises; • wars and geopolitical shocks. We cannot eliminate this risk simply by buying more stocks. In financial theory, it is mainly this type of risk, which cannot be fully diversified away, that justifies the risk premium: the additional return investors demand compared with an investment considered almost risk-free. A significant part of my TARGET-2035 portfolio strategy is now based on the belief that systematic risk is currently higher than it was during other market phases. This does not mean predicting a crisis. It means preparing the portfolio for the possibility that the future may be more difficult than the past. 🧠 RISK IS ALSO PERSONAL In textbooks, risk is often measured through volatility. In real life, however, investors should ask themselves three questions. 1️⃣ How much risk can I psychologically tolerate? This is risk tolerance. A portfolio is useless if the first market decline keeps us awake at night and pushes us to sell at the worst possible moment. 2️⃣ How much risk can I afford to take? This is risk capacity. A young person investing for the next forty years generally has more time to recover from a market crisis than someone who will need the money in two years. 3️⃣ How much risk do I actually need to take? This is risk necessity. If our financial goals can be achieved with moderate returns, there is no rational reason to make extreme bets. The most important question is therefore not: “How much can I earn?” It is: “How much can I lose without compromising my goals or panicking and selling everything?” Returns are what we hope to achieve. Risk is what we must learn to manage. I am @IlMatematico and through Rules, Discipline and Time, I work every day to build a portfolio aimed at long-term financial serenity, both for myself and for those who choose to copy me. Follow me to stay updated on my investment activity across $SPX500, $NSDQ100 and the crypto space!

Not investment advice. The author may have financial interests in the mentioned instruments.

3 Mentioned

SPX500

SPX500 Index (Non Expiry)

NSDQ100

NASDAQ100 Index (Non Expiry)

IlMatematico

Roberto Anzellotti

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