How to protect your portfolio

Protect your portfolio

4 Responses

  1. An excellent post, well worth reading. Thank you. Having been an adviser for many years and most recently an academic teaching undergraduate advisers, I could safely say that 99.999% of all private investors would not have addressed any of the issue’s you have. I could also say (rather cynically) that 99% of advisers would probably have failed to address any of the points you raised for their client’s benefit.

    The regular rebalancing of portfolio weightings to the original risk intentions is to me probably the best overall safety valve a portfolio could have. Often overlooked, and usually, because equities are booming, the greed of investors clouds their judgment until too late.

    Interestingly you mentioned negative correlation in addition to diversification. It seems to me that many investors miss this point in favor of a spread across markets and sectors. With the introduction of Robo advice, index ETF ‘s seem to have become ‘de rigueur’ as regards the ultimate balanced portfolio. No doubt Millenials will be learning a valuable lesson about index investing during the next prolonged bear market!

    I certainly enjoyed your post. Adrian

    • Mike Rawson Mike Rawson says:

      Thanks for the kind words, Adrian.

      As usual, the proof of the pudding is in the eating. It will take me a few months to work through all the protection options, so I just hope that my nightmare scenarios don’t come to fruition in the meantime.

  2. David says:

    Hi Mike

    Just wanted to say great article and looking forward to following / participating in the discussions. It has always struck me that the finance industry’s advice has basically been quite simply;
    1. Diversify
    2. Grin and bear it as nobody can predict the timing of market crashes.
    There seems to be alot of concern of an increased risk of market correction posed by higher market valuations. Yet because the ‘trigger’ of a correction is unpredictable – very little attempt is made to link a risk management strategy to market valuations .

    In the same way advisors recommend feeding a lump sum into the market gradually to avoid unfortunate timing when investing – isn’t there a case for a similar gradual withdrawal from the market as risks (valuations) rise which lay the groundwork for the pyschology for ‘trigger’ events ?

    Surely it is possible to come up with something better than ‘grin & bear it’

    Regards David

    Nb I found your list of possible risk management techniques very impressive …… and helpful

    • Mike Rawson Mike Rawson says:

      I think that the reason most people don’t advise gradually withdrawing cash as the market rises is that a lot of us then find it difficult to redeploy the cash after the market has fallen. It’s actually very hard to buy at the bottom.

      The second problem is that valuations – while a very good guide to long-term returns – are notoriously bad at predicting crashes. So you need to take the money out quite gradually.

      I’ve been taking out cash since 2010, doubling my position to 18%. But now I think we are in the blow-off phase and I’m starting to look for ways to use some of that actively (rather than in passive indexing). I aim to pull it all back quickly if there is a crash, but let’s see.

      I’m also quite interested in trend-following strategies, which are another version of market timing.

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How to protect your portfolio

by Mike Rawson time to read: 6 min
More in Active investing, Defensive, Mike's portfolio
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