Managing Risks


When I started my career on Wall Street, one of the first books given to me was about trading risks. At first, I thought it was only about trading stocks, something I was not interested in. But it wasn’t entirely. It was literally about trading risks.

So naturally I began thinking about tradeoffs. What risk levels am I comfortable with? What risks can I hedge or protect against? Now this opened my eyes to a different world of investing.

You see, the single skill that differentiated good from great investors was risk management on Wall Street. Even the best hedge fund managers make the mistake of taking on too much of the wrong risk. Which means there are risks worth taking. And in this section we will breakdown which ones.




different from macro market risks. i split this out because it has become a serious concern overtime

How can I manage economic risks like inflation?

Economic risks such as inflation can be managed through diversification of investments and holding a mix of assets such as stocks, bonds, and real estate. Additionally, investing in assets that are not tied to a specific currency can also help manage inflation risks. Another strategy is to invest in inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS) which offer a fixed rate of return plus an adjustment for inflation. It's important to consider the long-term horizon of investments and seek professional financial advice to make informed investment decisions that align with your risk tolerance and financial goals.

Systemic vs systematic risks

During the Great Financial Crisis, there were a lot of discussions around systemic vs systematic risks. You see, the banking industry was on tilt. No one knew if the spillover from one sector (systemic) would impact the entire market (systematic). Well 2008 was the first time this was a serious possibility.

Banking is unique because it finances industry. The same happens with mission critical industries like energy where countries sometimes go to war.


Another unknown unknown. Politics is tough to tame. There are too many parts and the incentives are misaligned. Investors can’t control much in these situations.

How can I manage political risks?

Political risks refer to the uncertainties and potential losses that may arise from changes in government policies, laws, or regulations. To manage political risks, investors can take the following steps:

Conduct thorough research and analysis of the political environment in the country where they plan to invest.

Look for investment opportunities in countries with stable political systems and predictable government policies.

Consider investing in countries with strong rule of law and protection of property rights.

Use hedging strategies such as options, futures, or currency swaps to mitigate the impact of political risks on their investments.

Diversify investments across multiple countries and sectors to reduce the impact of political risks on their overall portfolio.

Monitor political developments closely and regularly review their investment strategy in light of changing circumstances.

Consider seeking advice from experienced professionals, such as political risk consultants or financial advisors.


Market risk: The risk that the value of an investment will decline due to changes in the stock market or the overall economy.

Credit risk: The risk that the borrower will default on their debt obligations.

Liquidity risk: The risk that an investor will be unable to sell an investment due to a lack of buyers.

Interest rate risk: The risk that changes in interest rates will impact the value of an investment.

Currency risk: The risk that changes in currency exchange rates will impact the value of an investment.

Inflation risk: The risk that the value of an investment will be eroded over time by rising prices.

Political risk: The risk that government actions or political instability will negatively impact the value of an investment.

Operational risk: The risk that business operations will be disrupted, leading to a decline in value.

Reputation risk: The risk that damage to a company's reputation will negatively impact its financial performance.

Legal risk: The risk that legal or regulatory changes will negatively impact the value of an investment.

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