But investing is brimming with risks and it's not possible to avoid every single one of them. As Chris Dillow has warned investors: "It is inevitable that one or two holdings will fail. No investor, not even Warren Buffett, has a 100 per cent success rate." This week it's Globo. Last month it was VW. Before that banks, and BP - sticking to brightly lit main roads is no guarantee of safety. In another era it was Polly Peck. Often the market will give a warning, but we can choose to ignore it.
If you want to avoid frights, adopt low-risk investment habits. Obviously if you can't afford losses, then speculative high-risk shares should be out of bounds for you. No matter how cheap the price, or how tempting the growth potential, the downside is always 100 per cent. What really matters is diversification so that you can offset losses with gains elsewhere. But there's no point creating a portfolio with so many holdings it resembles a tracker fund with much higher costs. If you're a low-risk investor, one of the basic safety principles we iterate in our Portfolio Clinic is to construct a portfolio with a solid, low-risk core and then add satellite riskier funds and shares.
Steering clear of danger, though, isn't simply about keeping away from flammable investments. It's also about using strategies that work. To start with, have a clear idea of the returns you can expect from your holdings - in the Portfolio Clinic we use rules of thumb to calculate likely gains and losses for different assets.
You cannot buy and forget. You need to monitor and rebalance allocations in line with your original plan or you could end up heavily exposed to a single holding or asset. To quote one Portfolio Clinic expert: you wouldn't fly on an aircraft that was not regularly serviced. Watch out for overlaps and high correlations, too.
You need to make allowances for the blights of stock-specific risk, secular stagnation and creative destruction. Study the companies you buy and know how to read their balance sheets. Learn from your investments. Chris Dillow advises writing down the reasons you bought a share then later checking to see if they were good ones, and if they weren't to piece together what went wrong.
Use strategies that studies show have an increased chance of outperforming: they are value, momentum and defensive. As defensives tend to be lightly correlated with speculative stocks, a mix of the two is one way of diluting the risk of the latter.
And there is always a case for holding some cash, says Chris Dillow, "as its worst-case return (the real interest rate) is much better than the worst-case return on equities".
