Investment Risk Explained: How Much Diversification Do You Need?

Investing isn’t about avoiding risk; it’s about taking the right risks and avoiding the wrong risks. In episode 15 of Greenstream, we break down what risk means, the difference between compensated (right) and uncompensated (wrong) risk, and why most investors underestimate risk.

You’ll learn:

• What different types of risk matter: catastrophic, opportunity cost, and missed goals
• Why individual stocks are riskier than you might think (even Apple and Meta)
• How much diversification it takes to move beyond concentration risk
• Why risk premiums exist and how we can use them to pursue higher expected returns

Our next episode will shift from investment to investor risk, where we’ll look at the behavioral challenges of sticking to your investment plan. You can subscribe here.

 

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Sources:

1 Do Stocks Outperform Treasury Bills? by Hendrik Bessembinder :: SSRN https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

2 JP Morgan’s The Agony and The Ecstasy (2021) https://privatebank.jpmorgan.com/nam/en/insights/latest-and-featured/eotm/the-agony-the-ecstasy

3 JP Morgan’s The Agony and The Ecstasy (2024) https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/ideas-and-insights/the-agony-the-ecstasy

4Extreme Stock Market Performers, Part I: Expect Some Drawdowns by Hendrik Bessembinder :: SSRN https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3657604

5 Petajisto, Antti, Underperformance of Concentrated Stock Positions (June 30, 2023): https://ssrn.com/abstract=4541122

6 Fama, Eugene F. and French, Kenneth R., A Five-Factor Asset Pricing Model (September 2014): https://ssrn.com/abstract=2287202

7Harvey, Campbell R. and Liu, Yan and Zhu, Caroline, …and the Cross-Section of Expected Returns (February 3, 2015): https://ssrn.com/abstract=2249314

8 The Three Ways To Beat The Market | Greenstream #2: hhttps://youtu.be/XeGNGWNbF-8

9 Asness, Cliff S. and Frazzini, Andrea and Israel, Ronen and Moskowitz, Tobias J. and Moskowitz, Tobias J. and Pedersen, Lasse Heje, Size Matters, If You Control Your Junk (January 22, 2015): https://ssrn.com/abstract=2553889

10  Rizova, Savina and Saito, Namiko, Investment and Expected Stock Returns (July 8, 2020): https://ssrn.com/abstract=3646575

 

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.