Risk Management

Risk management may be the most important concept for your portfolio. Topics include the different types of risk, risk management benefits, how to analyze and reduce risk, etc.

Risk management investing articles on risk, diversification, asset allocation, preservation of capital, asset correlations, bubbles, hedging, etc.

The Art of Position Sizing to Manage Money and Risk

December 14, 2011

Position sizing is a critical money risk management concept. The best risk management plan is diversification that includes asset allocation rules. These rules will be the framework from which the first steps toward position sizing decisions are made. As an example, here are the diversification rules of my risk management plan: Never Put More Than [...]

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Risk On (ONN) and Risk Off (OFF) Trading Vehicles Now Available

December 12, 2011

Risk ONN, Risk OFF Simply put, the Risk On, Risk Off Trade is based on the tug of war between inflationary and deflationary forces. Since 2008 there has been a trend towards higher asset correlations which can be, at least partially, attributed to the risk on, risk off trade. Apparently UBS feels there is interest [...]

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Risk management investing articles on risk, diversification, asset allocation, preservation of capital, asset correlations, bubbles, hedging, etc.

Warning Signs of a Market Price Bubble

December 9, 2011

Market Price Bubble A market price bubble is a spike of an asset value far above its real or intrinsic value. Bubbles are usually identified conclusively only after prices return to fundamental intrinsic values. Market price bubbles have been a part of investing for as long as investing has existed. By definition they draw masses [...]

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Inverse ETFs Provide Portfolio Hedging Strategies

December 4, 2011

Hedging Strategies Can Lower Risk Hedging is a potent risk diversification strategy employed by purchasing an investment that is inversely correlated to other assets in a portfolio. Inverse ETFs provide a low cost vehicle for a portfolio manager to take the market risk partially or wholly out of an entire portfolio or a specific segment [...]

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Risk management investing articles on risk, diversification, asset allocation, preservation of capital, asset correlations, bubbles, hedging, etc.

Diversification Can Be Dangerous to Your Portfolio Returns

November 25, 2011

Disadvantages of Over Diversification We often look at the importance of diversification because it is a cornerstone of investment management. The best risk management plan is diversification and I follow strict diversification rules in managing the AAAMP. And, as we have discussed in previous posts, there are many advantages of portfolio diversification; but some lessons [...]

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What is the Risk On, Risk Off Trade and How Has it Affected Asset Correlation?

November 2, 2011

The effect of the Risk On, Risk Off Trade is to cause asset correlation to become more positive. What is the Risk On, Risk Off Trade? Since the financial crises in 2008 there has been a growing trend of investors, particularly institutional investors, to buy risk (risk on) when inflation is the leading prospect for [...]

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Risk management investing articles on risk, diversification, asset allocation, preservation of capital, asset correlations, bubbles, hedging, etc.

Portfolio Rebalancing – A Powerful Risk Management Strategy

October 27, 2011

Rebalance Your Portfolio Portfolio rebalancing is a powerful risk management investment strategy which involves buying or selling investments to achieve a desired strategic asset allocation. Rebalancing Strategies Rebalance Because of a Change in Asset Prices – Over time, as a portfolio’s assets change in price it can easily move the portfolio to a position that [...]

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Preservation of Capital and Allocation of Assets

August 25, 2011

Preservation of capital and allocation of assets go hand in hand.  Asset allocation is the major determinant of portfolio returns and the means to portfolio optimization and risk management. Preservation of Capital Preservation of capital is one of the most important concepts of portfolio management.  Unfortunately, despite a great deal of lip service, preservation of [...]

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Risk management investing articles on risk, diversification, asset allocation, preservation of capital, asset correlations, bubbles, hedging, etc.

Systematic and Unsystematic Risk, Probability, and Expected Value

August 19, 2011

Types of Investment Risk Risk is the amount an asset deviates from its’ expected value and the probability of that deviation. Total risk is made up of two types of risk; systematic risk and unsystematic risk. If risk can be described in one word, it would be volatility. Systematic Risk Systematic risk is the risk [...]

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Interest Rate Risk, Not Credit Risk, is Why You Should Sell Bonds

August 7, 2011

Should Credit Risk Cause Investors to Sell Treasury Bonds? The credit risk of treasury bonds has increased as evidenced by the S&P downgrading of United States debt to AA+ from AAA. While I don’t want to down play this historic and tragic downgrade that didn’t need to happen, it doesn’t change the fact the United [...]

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