Chapter 4

Risk Control, Diversification, and Some Other Things You Need to Know

In This Chapter

arrow Understanding the relationship between risk and return

arrow Measuring risk

arrow Introducing Modern Portfolio Theory

arrow Addressing the assertion that “MPT is dead”

arrow Seeking a balanced portfolio

October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.

Mark Twain

A peculiarly good writer, but also a peculiarly bad money manager, Twain sent his entire fortune down the river on a few bad investments. A century and a half later, investing, especially in stocks, can still be a peculiarly dangerous game. But today we have low-cost indexed ETFs and a lot more knowledge about the power of diversification. Together, these two things can help lessen the dangers and heighten the rewards of the stock market. In this chapter, I hope to make you a better stock investor — at least better ...

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