A point worth serious thought from Nassim Taleb from his book “Antifagile: things that gain from disorder”.
Yes, he creates, I think, an appropriate new word (antifragile) to help get his meaning across. In one area Taleb presents his argument on medium risk (referral to a financial portfolio) and how he considers there to be no such thing as “moderate” risk.
His point is that in the event of a “Black Swan”, that is a catastrophic negative event, then all – low, medium and high – risk is going to get hit. (As an aside, I consider that a negative Black Swan, to an expert intraday trader, can become a positive Black Swan).
Fully committed to a “moderate” risk account is, actually, at full risk; at best, this provides medium upside potential but with all the possible downside. That is because medium risks can be subjected to huge measurement errors.
Taleb points out that: rather than being fully committed to a “moderate” risk portfolio (and in the event of a negative Black Swan, a potentially emotionally draining experience); better to be 90 or 80 percent in a boring, inflation proof, no risk cash (or: bond, cash, share mix – my words) account and 10 to 20 percent in a very high risk account. (Taleb uses 10 percent very high risk, I’m simply following Pareto’s law)
The 80/20 example means that we have little downside – assuming that 10 to 20 percent downside is acceptable – whilst still exposed to massive upside.
To finish, Taleb writes: “Someone with 100 percent in so-called ‘medium’ risk securities has a risk of total ruin from the miscomputation of risks”…..”that in fact is a sucker game”.