The amount of risk embedded in an investment decision comes from what you pay, not in the asset itself. In other words, risk is the potential for a decrease in price, against the value of the asset.
Bullish sentiment drives prices up and above the value of the asset, so the best and simplest form of risk management is avoiding overpaying for overpriced assets.
Connections
Outcomes Don’t Communicate Risk
Link Explanation: You can buy a stock at an elevated price, and it can continue to go up for several months, or even years. If you sold at the top, you would’ve made a nice amount of gain. However, that does not mean you didn’t take on excessive risk when the stock was purchased.
Reference
🟢 The Most Important Thing Uncommon Sense for the Thoughtful Investor