In his famous “Two Rules of Investing”, the great Warren Buffett says:
- Rule #1 – Never Lose Money
- Rule #2 – Don’t Forget Rule #1
It sounds so simple and it makes a great soundbite, but it’s often easier said than done when it comes to your own investment portfolio.
Risk comes from many different places and takes many different forms. A few of the more common types of investing risk, include:
- Market Specific Risk—According to Investopedia, market risk is the possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets in which he or she is involved. Sources of market risk include recessions, political turmoil and changes in interest rates.
- Stock Specific Risk—The risks of the company whose equity or stock you hold. Will they become irrelevant in their industry? Could they go out of business in the near future? It greatly depends on the company’s management team, products and financial performance.
How You Can Mitigate Risk
So how can you protect yourself and your family? You need to employ sound risk mitigation and investing strategies, and now is a great time to review your portfolio because the markets are performing well at the moment. At ICMC, we use several primary risk mitigation strategies, including:
- Diversify into multiple different asset classes, each with reduced correlations to each other. Meaning, if one asset class, say natural resources, tanks, your investment in a non-correlated asset class such as real estate, may be minimally affected. This reduces the risk of a potential decline in a specific asset class—such as the current bond market.
- Diversify within each individual asset class to reduce investment-specific risk. You don’t want to put all your proverbial eggs in one particular investment (i.e. one specific stock or, say, a single real estate opportunity). You need a wide range investments within each asset class. This reduces the risk of a significant downturn in the value of any specific investment.
- Employ proprietary and third-party stop-loss programs to signal times to reduce exposure in liquid asset classes. Some wealth management advisors may have their own systems that can signal when an investor should enter or exit an asset class. ICMC’s Market Adaptive Portfolio Strategy (MAPS) is such a system that combines elements from Modern Portfolio Theory with their own proprietary technology to constantly analyze market trends and signal the best time to buy or sell any particular asset class.
Want to Know Your Tolerance for Risk?
If you have questions about how you can minimize risk in your portfolio, then we’re happy to help. Click here to submit your question today. Also, if you’d like a FREE analysis of your risk tolerance with our Risk Number Analyzer, then click here.