Risk Managment With ETFs

Portfolio management is more than just buying and selling stocks. Unfortunately in today’s market trading has dominated and we lose perspective as investors relative to the real objective of portfolio management. For me it is managing each position in your portfolio based on a predefined strategy, and the discipline to act on the strategy relative to the objective or purpose is paramount to successful risk management.

This is not a contest of who can make the most money in the least amount of time. That game is won by luck or being in the right place at the right time. Too often individuals take on too much risk and it works out in their favor. I was taught not to confuse market trends with brilliance.  The goal in portfolio management is understand the purpose of each position, nothing more nothing less. That type of discipline will keep you from self-destructive habits.

Risk – What is it? in terms of investing it is the potential loss of principal. If I buy IBM stock what is the probability they will go out of business? That is risk. However, today’s investment community has redefined risk relative to IBM to be if I buy IBM today at $200 will I make money over the next day, week, month or year? In other words we want to define risk of owning a stock as a variable of time. This introduces complexity into the process and that is where the disconnect for most investors begins.

Think about the difference of Warren Buffet (Bershire Hathaway) versus John Paulson (infamous hedge fund manager) buying Coke stock. Buffet will hold it long term and not worry about the ups and downs of the stock as he believes they will not go out of business, in fact, if the price declines enough he will purchase more of the stock. His outlook is to make money over a long term time horizon. Paulson will trade the stocks and look how to maximize the returns almost daily through the use of complex trading strategies, etc. Both have been successful in their own way when it comes to results. The important part of this process is to know before you buy a stock what your objective is relative to time horizon and strategy.

Both strategies have their own risk, but the risk is managed and defined completely differently. That is where you and I have to make decisions of what type of risk we are going to manage in our portfolio… position by position. Are we concerned about the “now” issues facing the markets and/or the stock? Or are we focused on the long term outcome of the company achieving their defined mission statement over years? Traders (Paulson) tend to focus on the now. Investors (Buffet) tend to look long term and manage the risk as need be over time. The reality is a little of both, trader and investor, resides in most of us and that creates an internal conflict for management of risk in each position of our portfolio. We need to take time to define the purpose, strategy and discipline by which we will manage our money, position by position.

This Tuesday’s or Webinar, “Risk Management With ETFs” will start at 8 pm EST. Click here to register now. We will discuss the principles of Sector Rotation using ETFs and how the manage the risk of the portfolio position by position based on a defined strategy. We will cover both the Sector Rotation Model (short – intermediate term strategy) and ONLY ETF Model (trading or short term strategy) as examples of how to manage the risk of your portfolio.