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Ten Time-Tested Investment Portfolio Risk Minimizers

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Submitted by The Investment Shadow | RSS Feed | Add Comment | Bookmark Me! print

Market Cycle Investment Management is a logical, reality-based, alternative to MPT --- a sexy, but totally speculative, mathematical monster that pretends to know the future. Its focus is on market value curve smoothing rather than on capital building and income generation.

MPT aficionados admit that volatility (the natural state of markets) cripples user results --- MCIM users shout: "Bring It On, We Thrive On It"!

Don't mess with the investment gods; accept the cycles and volatility they throw at you; respect and use them wisely for a better chance at investment success. Find meaningful numbers that chart current positioning here: IGVSI.

Bohicket Creek, in coastal SC, has tides ranging from four to six feet, twice a day, every day --- not unlike the gyrations of the stock market. If you are out in the ocean at high tide, you risk walking home shin-deep in Pluff Mud a few hours later.

Boaters run aground by ignoring tides, charts, and GPSes. Investors get swamped with information, media noise, breaking news, politicians, gurus, and derivatives --- they can't see the oncoming tsunamis of cyclical change.

Most investment mistakes are caused by basic misunderstandings of the securities markets and by invalid performance expectations. Losing money on an investment may not be the result of an investment sandbar and not all mistakes in judgment result in broken propellers.

Errors occur most frequently when judgment is rocked out of the boat by emotion, hindsight, and misconceptions about how securities react to waves of varying economic, political, and hysterical circumstances. You are the captain of your investment ship. Use these ten risk-minimizers for portfolio navigation:

Note: All of these risk minimizing strategies work best individually, when they are all used in a portfolio, collectively.

1. Identify realistic goals that include time, risk-tolerance, and future income needs --- chart your course before you leave the pier. A well thought out plan will minimize tacking maneuvers. A well-captained plan will not need trendy hardware or exotic rigging.

2. Learn to distinguish between asset allocation and diversification. Asset allocation divides the portfolio between growth purpose and income purpose securities. Diversification limits the size of individual and sector holdings. Both hedge against the risk of loss and are done best with a cost based approach.

3. Be patient with your plan and think of it as a long-term voyage to a specific destination --- tack infrequently and "reach" broadly. There is no popular index or average that matches your portfolio, and calendar sub-divisions have no relationship to market, interest rate, or economic cycles.

4. Never fall in love with a security. No reasonable profit, in either class of security, should ever go unrealized. Profit targeting must be part of your plan, and keep in mind that three sevens beat two tens --- and is much easier to achieve

5. Prevent "analysis paralysis" from short circuiting your decision making powers. A narrow focus will reduce confusion, hindsight, course changes and hysteria. Run with cyclical winds and waves.

6. Burn or delete any short cuts or gimmicks that are supposed to provide instant stock picking success with minimum effort. Don't sport a hodgepodge portfolio of mutual funds, index ETFs, partnerships, pennies, hedges, shorts, metals, options, currencies, etc.

Consumers' obsession with products underlines how impossible it is for financial professionals to survive without them. Consumers buy products; investors select securities... pause and repeat.

7. Attend a workshop on interest rate expectation sensitive securities and learn to deal with changes in their market value --- in either direction. Few investors ever realize the full power of their income portfolio. Market value changes must be expected and understood, not reacted to with fear or greed. Fixed income does not mean fixed price.

8. Ignore Mother Nature's evil twin daughters, speculation and pessimism. They'll con you into buying at market peaks and panicking when prices fall, ignoring the cyclical opportunities provided by their Momma. Never buy stocks at all time high prices and avoid story stocks religiously. Always buy slowly when prices fall and sell quickly when targets are reached.

9. Step away from calendar year, market value thinking. Most investment errors involve unrealistic time horizons, and/or "apples to oranges" performance comparisons. The get rich slowly path is a more reliable investment road that Wall Street has allowed to become overgrown, if not abandoned.

10. Avoid the cheap, the easy, the confusing, the most popular, the future knowing, and the one-size-fits-all. There are no freebies or sure things on Wall Street, and the further you stray from conventional stocks and bonds, the more derivative risk you are adding to your portfolio.

Compounding the problems that investors face managing their investments is the sensationalism that the media brings to the process. Investing is a personal project where individual/family goals and objectives must dictate portfolio structure, management strategy, and performance evaluation techniques. It is absolutely not a competitive event.

Do most individual investors have difficulty minimizing investment risk in an environment that encourages instant gratification, supports all forms of speculation, and gets off on shortsighted reports, reactions, and achievements? You bet they do!

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