Risk Management Analysis
Risk management analysis is an important part of every investment portfolio. Studies show that investments with lower volatility (risk) tend to produce lower returns. This causes investors seeking high rates of returns to concentrate on higher risk common stock . Riskier stocks tend to be smaller and fundamentally weaker than the average stock. The more speculative stocks tend to lead the market up in rallies, but collapse in down markets.
Stock Market Risk Management
Volatility (risk) doesn’t seem to bother most investors during bull markets. This is one reason investors are “lulled” into taking additional risk as markets rise. The collapse of the credit and housing markets and the resultant damage to portfolios should cause investors to pay more attention to stock market risk management.
Market Risk Management Solutions
Investors need to realize there are appropriate times to take on more risk and appropriate times to have a conservative asset allocation plan. The best determination of long term risk is valuation. When the value of company shares is too high as evidenced by ROEV (Return On Enterprise Value) Stock Valuation Calculations, high price/earnings, high price book values, and/or low dividend yields, investors should have the flexibility to lower their portfolio asset allocation to equities.
Asset allocation, risk management, and value investing are essential concepts for self-directed investment management. Here are three articles to help you understand these concepts and how to employ them:
Tactical Asset Allocation Strategy – Avoid the “Cycle of Market Emotions”
Best Risk Management Plan is Diversification: Follow the 5-15-25% Rules
The Best Value Equity Asset Allocation Strategies: Employ Value Strategies
These risk management solutions not only lower portfolio risk but allow a portfolio manager to increase long term rates of return because they preserve capital in bear markets. These strategies win in two ways; first, the portfolio preserves capital in bear markets, and then allow for a more aggressive position when valuations are low.
Do you have any additional risk management strategies to share?
| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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