Over-caution is as bad as under-caution. Both are extremes to be guarded against. Life itself is filled with the element of chance.
~ Napoleon Hill, Think and Grow Rich
Thinking in terms of hedging, the above quote makes a lot of sense to trading and investing.
It’s obvious where not exercising at least a modicum of caution can be a recipe for disaster. If I’m not paying attention to my position sizing, stop loss levels, or proper execution techniques — then sooner or later it’s going to bite me.
Where it’s not as obvious is in the other extreme, where one might be too cautious and really doing more harm that good in protecting against any and every possible downtick.
The reality is, we get paid for taking on risk. If there were truly no or little risks for trading, it simply wouldn’t be profitable enough to justify the efforts and time. There has to be risk.
If I spend my time and energy putting on all kinds of hedges to ring out the possibility of any and all losses, well then my upside is going to be limited. Hedges cost money and become a drag on performance.
There is nothing wrong with applying practical hedges tactically at critical moments or when the market offers it up on the cheap. But there is a delicate dance between suitable hedging which allows for worthwhile upside, and over-hedging which all but ensures any profits will not be worth the effort.
This is a dance I’m often doing, or at least contemplating. It is definitely not one I’ve mastered. It’s likely I never will. But that doesn’t mean I can’t succeed. It just means there’s always room for improvement.