Erg-od-ic What?

asx 300 stocks asymmetrical investments avoiding bankruptcy in investments avoiding investment losses difference in outcomes ergodicity financial risk management group outcome vs individual outcome group vs individual outcomes investing in individual companies investing tips and strategies investment risk hierarchy investment strategies market index vs individual stocks portfolio management risk hierarchy in investing stock market insights stock market performance stock market risk understanding market indexes Jun 07, 2024

One principle we talk about often is our risk hierarchy. The risk hierarchy is designed to avoid losing money by using the concept of ergodicity which we discussed in a recent Subscriber Masterclass. 

In short, ergodicity means the difference in outcomes between a group and an individual. For example, the ASX 300 (as a group of 300 stocks) may rise 1% on any particular day. However, individual companies that are part of the group may fall highlighting a difference between the group outcome - a rise, and an individual outcome - a fall. As an individual, the group outcome is not applicable to you. 

The mistake many investors make is thinking that an individual company will get the same outcome as the group. Individual companies can and do go bankrupt all the time. Market indexes like the ASX 300 do not.

That is really why the risk hierarchy works. We make money by avoiding losses and one way to lose money, and sometimes a lot, is by having a portfolio of individual stocks rather than the index. Now there is nothing wrong with selecting individual companies for investment, but they should be very asymmetrical, meaning loads of upside and very little if any downside. Nor should you bet the house on any one investment no matter how good the odds.

But that's another blog post......

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