Although we covered position sizing in the previous module, I wanted to emphasize how important this is as a risk management tool, especially in relation to liquidity.

Reading is a nice piece by Morgan Housel who explains that risk is what we don’t see coming. This is a crucial concept – who could have foreseen Covid-19? Few expected the Global Financial Crisis, even those who were rightly concerned about debt and the state of the US housing market – risk is often about protecting the portfolio from the unknown unknowns.

A note on the quiz questions and answers:

If you really know one or two sectors very well and you have the ability to judge when to get out, that type of strategy will deliver a higher performance than a more balanced approach, if these are high growth areas. But if you are to pick a quite concentrated portfolio, having this spread of exposures we discussed earlier, will prove a better downside protection.

So balanced portfolios may not do as well as a more concentrated strategy but will be safer, at the cost of taking more time and effort to monitor, as there is a wider range of activities.