PosiStep 18: Risk and psychology: diversification, FOMO, tips and scams
Knowing the numbers is half the job. The other half is managing risk and your own behaviour, because many losses come not from bad companies but from bad decisions. This PosiStep covers both.
Diversification and position size
Diversification means spreading money across several companies and industries, so one bad surprise does not sink everything. Position size is how much of your money sits in one share. If 70% is in one company and it falls 40%, your whole portfolio falls 28%.
Spreading money cannot remove the risk of the whole market falling, but it greatly reduces the damage from any single company.
Volatility, drawdowns and time
Share prices swing. A drawdown is a fall from a peak: even strong companies have fallen 30% or more at times. Money you may need within a year or two, and your emergency savings, are usually better kept out of shares, so you are never forced to sell at a bad moment.
Borrowed money (margin, loans to buy shares) magnifies both gains and losses and can wipe out an account quickly. Many beginners' biggest losses involve leverage or derivatives.
The mind games: common biases
FOMO (fear of missing out) pushes people to buy after big rises. Loss aversion makes people hold losing shares too long, hoping to get back to even. Overconfidence after a few wins leads to bigger bets. Herd behaviour means buying because everyone else is. Anchoring means judging a price by an old number, such as "it was ₹500 last year, so ₹300 is cheap".
Writing down why you buy, and what would make you change your mind, helps against all of these.
How to spot scams
Warning signs: guaranteed returns; "sure-shot" or "multibagger" tips in WhatsApp or Telegram groups; pressure to act now; requests to transfer money to a person or an unknown app; fake trading apps showing big profits; and anyone asking for your login, OTP or password.
In India, anyone giving paid stock advice must be registered with SEBI as an Investment Adviser or Research Analyst; you can check their registration on SEBI's website. In the US, check advisers on the SEC's and FINRA's official sites.
A simple personal rulebook
Invest only money you will not need soon; avoid borrowed money; spread across several companies; research before buying; never act on tips alone; and review calmly, not daily. Simple rules followed consistently beat clever ideas followed occasionally.
Where PositoAI fits
PositoAI never gives buy or sell calls, tips or guaranteed returns, and never asks for your money or broker login. Its Watchlist lets you follow companies without acting on every move.
Key terms
- Diversification
- Spreading money across several companies and industries.
- Position size
- The share of your money held in one company.
- Drawdown
- A fall from a previous peak, in percent.
- Leverage
- Using borrowed money; magnifies gains and losses.
- FOMO
- Fear of missing out: buying because prices have already risen.
- Loss aversion
- Holding losers too long because losses feel painful.
Try it
Riya has ₹1,00,000 invested: ₹70,000 in one made-up company, Nova Pharma, and ₹30,000 spread across others that stay flat. Nova Pharma falls 40%. By how much does her total portfolio fall?
40% of ₹70,000 = ₹28,000 lost. ₹28,000 ÷ ₹1,00,000 = 28%. With ₹10,000 in Nova instead, the same fall would cost only 4% of the portfolio.
See it live on PositoAI
Add three companies from different industries to your Watchlist on PositoAI, for example Infosys (technology), a bank and a consumer company. Notice how their prices move differently over a few weeks.
What this does not tell you
No rule removes risk completely. A well-spread portfolio can still fall in a bear market, and a careful investor can still be wrong. Risk management limits damage; it does not guarantee profit.
Quick quiz
What is diversification?
Diversification spreads risk so that one company's problems cannot sink the whole portfolio.
Which is a sign of a scam?
No genuine investment can guarantee high returns; such promises are a classic scam sign.
Buying a share only because it has already risen a lot and everyone is talking about it is called:
Fear of missing out (FOMO) drives people to buy after big rises, often near the top.
Why is borrowed money (leverage) risky for beginners?
Leverage multiplies both outcomes; a modest fall can wipe out a large part of the account.
In India, how can you check if a paid stock adviser is genuine?
Paid advisers and research analysts must be registered with SEBI, and registration can be verified on SEBI's site.
Answer every question on this page correctly to complete this PosiStep.
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PosiCourse is for education only. It does not recommend buying or selling any share. Examples with made-up numbers are not real companies. PositoAI is for research and education only and is not investment advice.