[Summary]
Risk premium is the additional return required as compensation for taking risk.
Risk premium is a way to read market prices, but it can also be used to check where you tend to get impatient.
In actual investing, you first start by comparing the expected returns of stocks, bonds, and real estate. However, we cannot overlook the fact that it is easy to misunderstand high-return products as good products.
In this article, we will organize risk premiums not as "knowledge" but as steps to check before buying or selling. Don't rush to conclusions, read according to your financial amount and time horizon.
First, divide by risk premium.
When looking at risk premium, first determine what you want to judge. The information you need will change depending on whether you want to know the meaning, confirm before buying or selling, or review your current holdings.
Especially for beginners in investing, the easier the words are, the more they tend to take them as a conclusion. Risk premium is not the only material used to make decisions. If you want to check it, it is more realistic to look at it in conjunction with fund management, holding period, and opposing materials.
Misalignment between risk premium and emotions
When looking at risk premium as an investment psychology, first make narrow assumptions. It is important not to mix up whether you are talking about the market as a whole, individual stocks, NISA or long-term funds.
Checking the following points will make things a lot easier.
| Axis to check | What to look for in risk premium |
|---|---|
| purpose | What do you use to judge? |
| Time axis | Which is closer to short-term trading, long-term holding, or NISA? |
| basis | Which one is more important: price, business performance, interest rates, exchange rates, or psychology? |
| risk | When things go the other way, where should you look again? |
| action | Will it lead to buying, selling, or doing nothing? |
Points that can easily cause trouble in making decisions
Risk premiums don't only stumble when you lack knowledge. In fact, there are situations where we interpret something conveniently because we know a little bit about it.
- Record your anxiety and sense of relief when you see the risk premium
- Write down the same number of reasons why you want to buy and reasons why you don't.
- Wait a day before making decisions after unrealized losses or sudden rises.
- Reduce trading amounts on days when emotions are strong
The important thing here is not to settle on a single correct answer based solely on risk premium. In investment, the meaning of the same material changes depending on the market, holding period, and amount of funds. When in doubt, prioritize confirmation over conclusion.
Checklist before buying and selling
Before using risk premium as an actual deciding factor, check at least these five things.
- Can you explain in one sentence the purpose of looking at risk premium?
- Have you confirmed one or more countermeasures or failure conditions?
- Are you investing your living funds or money that will be used soon?
- Have you decided in advance the criteria for cutting losses, taking profits, and continuing to hold stocks?
- Are you making judgments based only on social media or short headlines?
Checklists are simple, but they prevent you from adding reasons after making a decision. The purpose of checking the risk premium is not to act faster, but to reduce unnecessary judgment errors.
Summary
Risk premium is a material for organizing investment decisions. Even if you read it as an investment psychology, if you treat it as a standalone buy or sell signal, your judgment will be inaccurate.
The points to keep in mind are as follows.
- Decide first the purpose of looking at the risk premium
- Do not mix time axis and amount of funds
- Check not only good materials but also negative materials
- When using NISA and long-term funds, consider how to handle losses
- When in doubt, reduce your position or postpone it.
The more knowledge you have, the safer it seems, but in the market it can become dangerous if you use it incorrectly. It is realistic to treat risk premium as a tool to pause before buying or selling, rather than a word that forces you to make a hasty decision.