Managing Risk In Your Portfolio

Let’s get it all out on the table. We are totally baffled by what is going on in the market! The average person does not trade stocks, but rather will hold them for a number of years. We have two things working for us. One, the market is down and pretty much every stock is cheap. You can sit there and say two to five letters out and pick a winning ticker. Let’s put it this way geniuses; anyone who bought anything since January 1st, made money. That is just dumb luck or a very savvy person seeing a downturn turning further down.

Let’s be honest, no one saw the down turn (the big one in October) coming, except me. I missed the bottom by two weeks premature. I did not however, realize there would be a 25% hike from that bottom by mid-November. I figured the run would come in December. But, the market is a crazy thing. No one is immune to the carnage that can come from what the market can do. Diversification is the key; you need to spread your investments appropriate to your age and investment goals.

If you set some rules for yourself, you can remove the emotional moves that people make and ultimately keep yourself out of serious trouble. Setting up buy points and sell points can lead you to simply sell when the price reaches a certain point and buy when the price falls to a certain level. A lot of hedge fund managers operate in a similar manner. Keeping a certain percent cash level in your portfolio is also another way to tell yourself to buy or sell.

Rebalancing your asset spread can also help you sell off stock and take gains and buy more stock that has dropped. A very simple example is you own $50 of Company A and $50 of Company B. At the end of the month, Company A’s stock value is $60 and Company B’s stock value is $45. Your portfolio is worth $105 (up from $100). If you rebalance your portfolio, you would have to sell $7.50 worth of Company A stock and pick up $7.50 worth of Company B stock in order to have Company A and Company B’s value be $52.50.

Keep these little tips to help navigate the madness. Generally, using these tactics, will mitigate risk, but the trade off is that you will rarely buy at the bottom and sell at the top. The idea is risk management. Keep on keepin’ on!