3 Keys to Reduce Risk
Reducing your risk during times of market volatility, or any time, can help preserve your portfolio.
There are several ways you can achieve this while maintaining either an aggressive or conservative investment strategy.
A principle of investing is to minimize drawdown, the percentage your portfolio drops at any one time or between the market highs and the lows.
If you invest with the buy and hold philosophy you will most likely experience dramatic drawdowns over the course of time, and while your portfolio may recover from these losses, if you need to cash out part or all of your money in the midst of these drops, you will suffer with big money losses.
This is the underlying fault of the buy and hold concept.
The alternative to buy & hold is to be willing to trade and: • Take profits • Cut losses to a minimum • Buy at the best opportunity Using a good investment software program you should be able to set buy sell rules to help you reduce risk.
Some of these rules may give you signals for when to simply get out of the markets, while others will help you avoid massive or even medium size losses (drawdowns).
Keys to risk reduction include: • Standard Deviation - adding this type calculation to your analysis can help to reduce risk as sell signals are generated when a ticker drops too far from its "typical" deviation or up-down movement.
You can use standard deviation with many types of analysis: alpha, relative strength momentum, return...
are just a few examples.
• Benchmark Exit - this signal will tell you when to quit investing and either move to cash or a safer position like bonds.
The signal is triggered when a key index like the S&P 500 cuts down through its moving average (a moving average between 90 -150 seems to work best).
• Equity Curve - an equity curve based on a group of tickers can signal when to stop using a particular investment strategy set of buy sell rules.
An equity curve uses the moving average of the strategies performance.
A stop signal is generated when the performance line of the strategy cuts down through the moving average line (a moving average of 100 works well in volatile times while 250 works during a long term upward running market).
You can even employ two or three of these risk reduction conceptions at the same time.
You can have a strategy, for example, analyzing the performance of a group based on return with standard deviation and also look at the benchmark exit or the equity curve to be sure it is a good time to invest or a good time to use the particular strategy's set of buy sell rules.
There are several ways you can achieve this while maintaining either an aggressive or conservative investment strategy.
A principle of investing is to minimize drawdown, the percentage your portfolio drops at any one time or between the market highs and the lows.
If you invest with the buy and hold philosophy you will most likely experience dramatic drawdowns over the course of time, and while your portfolio may recover from these losses, if you need to cash out part or all of your money in the midst of these drops, you will suffer with big money losses.
This is the underlying fault of the buy and hold concept.
The alternative to buy & hold is to be willing to trade and: • Take profits • Cut losses to a minimum • Buy at the best opportunity Using a good investment software program you should be able to set buy sell rules to help you reduce risk.
Some of these rules may give you signals for when to simply get out of the markets, while others will help you avoid massive or even medium size losses (drawdowns).
Keys to risk reduction include: • Standard Deviation - adding this type calculation to your analysis can help to reduce risk as sell signals are generated when a ticker drops too far from its "typical" deviation or up-down movement.
You can use standard deviation with many types of analysis: alpha, relative strength momentum, return...
are just a few examples.
• Benchmark Exit - this signal will tell you when to quit investing and either move to cash or a safer position like bonds.
The signal is triggered when a key index like the S&P 500 cuts down through its moving average (a moving average between 90 -150 seems to work best).
• Equity Curve - an equity curve based on a group of tickers can signal when to stop using a particular investment strategy set of buy sell rules.
An equity curve uses the moving average of the strategies performance.
A stop signal is generated when the performance line of the strategy cuts down through the moving average line (a moving average of 100 works well in volatile times while 250 works during a long term upward running market).
You can even employ two or three of these risk reduction conceptions at the same time.
You can have a strategy, for example, analyzing the performance of a group based on return with standard deviation and also look at the benchmark exit or the equity curve to be sure it is a good time to invest or a good time to use the particular strategy's set of buy sell rules.
Source...