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The question to everyone's answer is usually asked from within.
-The Steve Miller Band

Ask an accomplished investor or a world-class poker player to list the most critical skills it takes to be a consistent winner. Common answers include hard work, situational awareness, sound money management, a set of rules and the discipline to stick to them and the ability to read your opponents.

But the number-one skill these elite players cite is the ability to calculate the odds of winning or losing on any hand, bet, trade or strategy. Investors and gamblers who do the calculation have a distinct advantage over those who don’t.

We know three things about the market:

  1. This historic bull market will come to an end.
  2. There will be another bear market and it’s coming closer every day.
  3. Nobody knows precisely when either of these things will happen.

The relationship between risk and reward is a cornerstone of Modern Portfolio Theory. It’s an easy concept to grasp – the greater the risk, the greater the reward – but how do you measure these two things?

The reward part is easy. The stock market churns out a 10% nominal annual reward, on average. But the risk part is harder. What, if anything, should you do when the market hits a rough patch? Thankfully, most of the bumps along the way will be mild and brief. That is, until the next “big one” arrives.

Nobody knows if the next drop will be mild or the beginning of a serious bear market. In 1929 investors lost 80% of their savings. It took 28 years for them to make it all back. At least half of them died before they got even.