# Risk Management



## Zaxon (6 August 2019)

With the recent, sharp drop in the share market, I thought it would be a good time to revisit risk management.  Specifically, I'm looking from a medium time horizon: holding stocks for a few months.

*Break-even Stops*

Traders have the concept of break-even stops.  They're designed to make you feel good, because should you hit that stop, you haven't lost any money. But I'm wondering with medium term investing, do BE stops really make as much sense?

Consider this: $100k into share XYZ.  After a few months (or years), the share has had a nice run up, and is now worth $150k.  You have in place a BE stop.  Good!  You can't lose any money! But if it hits that stop, you've lost 50 thousand dollars: 50% of your wealth (in that stock).  So my question is whether the concept of BE stops is even useful in longer term investing?  (Hopefully you'd have other stops in place anyway.)

*Whole Portfolio Risk*

Secondly, let's assume, because you're a longer term investor, you use a trailing loss of 20% (for the simple purpose of this discussion).  You allocate 5% of your portfolio per stock.  20% of 5% = 1%.  That's 1% maximum loss (of your portfolio) per stock.  Sounds safe!  But then the market crashes, and all your shares lose 20% together.  Suddenly 1% estimated risk becomes 20% actual risk. The question is, is there a way of mitigating this?  I don't believe there is (for the average, vanilla investor), but I'm interested to hear your thoughts.


----------



## qldfrog (6 August 2019)

Fully agree with you on the first point pure feel good, but  number wise, there is no meaning in break even stop: how long, break even exit after a week or even month: great, but after 4 years...
Purely psychological
My experience with stop loss is that when you really need then for a magnitude event aka market crash or black swan, your stop loss get pulverized and you are back on your computer  rushing to limit the damages.my 2c only, but great in normal trading etc


----------



## tech/a (6 August 2019)

My long term super holdings are still within the systems parameters 
Total down 6.6% ( not happy about that omen ).
Even with my long term holdings I initially have a break even stop as part of the input parameters.

The rest is part of the system

I personally don’t think this market action is an outlier.


----------



## IFocus (6 August 2019)

If your hold time is a few months then you are likely rotating in and out of stocks on a regular basis.

Fuzzy time frame trader or investor?

This means a stop loss point (tested?) based 1st on market conditions then maybe on value, profit or loss.

If your hold time is years then you have entered (I am making assumptions) based on price, valuation or growth with the option to top up during major dips (thinking Craft like simplistic), selling due to changes to the issues around the stock not market conditions.

Risk management must compliment be integral to the over all strategy (obviously) not a add on.

Risk can be manged by stop loss (driven by market conditions), buying value (big leeway due to upside long term), buying a market leader or maybe buying income or any method that provides a buffer to the down side.

Then there is a hedge position,  issue is when do you take a position to hedge against losses protect profits(trader territory perhaps).
My own approach is to look at this in and around the 1st  lower low (depending on price action) and happy to be stopped out at break even-ish.


----------



## CBerg (6 August 2019)

IFocus said:


> If your hold time is a few months then you are likely rotating in and out of stocks on a regular basis.
> 
> Fuzzy time frame trader or investor?
> 
> ...



I think you nail it from my perspective.

I want to own a stock to capture the current & future business earnings. Provided the underlying business/assets aren't impaired than price can go up & down all day.


----------



## Zaxon (6 August 2019)

qldfrog said:


> My experience with stop loss is that when you really need then for a magnitude event aka market crash or black swan, your stop loss get pulverized and you are back on your computer  rushing to limit the damages.my 2c only, but great in normal trading etc



I've seen a lot of "gapping" in the last few days, where the stock will open below your stop-loss, or as you say, just blow straight past it: your stop-loss triggers, but the price has already gone much lower by then.  

I think the only solution is to manually chase it.  Otherwise you've become a buy-and-holder, in which case you wouldn't have had the stop-loss to begin with.


----------



## Zaxon (7 August 2019)

tech/a said:


> Even with my long term holdings I initially have a break even stop as part of the input parameters.



You can certainly have one initially.  And that's not a bad idea. But as the months roll on and you've seen substantial growth, then I think the idea of "I haven't really lost anything if I break even" becomes less 
true.



tech/a said:


> I personally don’t think this market action is an outlier.



I see drops in the market as a great chance to test the protections you have in place, and see how they're really working.  I know you have strong ideas on risk management.  Can you scale your same trading risk management to longer term?


----------



## Smurf1976 (7 August 2019)

Zaxon said:


> I've seen a lot of "gapping" in the last few days, where the stock will open below your stop-loss, or as you say, just blow straight past it: your stop-loss triggers, but the price has already gone much lower by then




My view is to always consider that whilst the market as a whole will not go zero, any individual stock can in practice lose most or all of its value if things go badly wrong.

For something like a supermarket chain it's pretty unlikely that they'd go to zero in a hurry but for something like an airline or mining company, well consider the likely impact on the value of the shares if the company had a major incident (plane crash, mine blows up, whatever) yesterday. Market down heavily + major incident = price is going to blow straight past your stops and probably by a substantial amount.

Stops are fine as a concept but no guarantee you're actually getting out at that price. Personally I view them as being a bit like planning an outdoor event based on a location's long term weather records. Just because statistically it's unlikely to rain on any given day in January is no guarantee that it won't rain on the day of your event. Choosing to hold it in Summer has reduced your risk but not eliminated it - worst case you could still end up with a flood. Plan accordingly.


----------



## Zaxon (7 August 2019)

IFocus said:


> If your hold time is a few months then you are likely rotating in and out of stocks on a regular basis.
> Fuzzy time frame trader or investor?



I'd call that a "position trader".  Part investor, and part trader, and has a mindset borrowing from both camps.


IFocus said:


> Then there is a hedge position,  issue is when do you take a position to hedge against losses protect profits(trader territory perhaps).
> My own approach is to look at this in and around the 1st  lower low (depending on price action) and happy to be stopped out at break even-ish.



Hedging is particularly relevant.  And as you mentioned it, I thought this is the perfect opportunity to jump into a deeper discussion on hedging. So let's break down the options, basing it on the context of this thread: holding positions for a few months.

*Buying Puts*

You can buy puts against your shares.  All the research I've seen says that buying puts is like insurance: it will save you in a black swan event, but you'll never get out of it (in claims) as much as you'll pay into in premiums over the long run.  So over time, buying puts as a hedge (rolling puts) causes you to significantly underperform the market.

*Diversifying*

I think this is quite important: if you only hold 5 stocks you've possibly seen massive pain in the last few days.  If you hold 200 (so probably an index fund), then it hasn't been so bad.  But diversifying within stocks only protects you from idiosyncratic (individual share) risk, not whole market risk.  And we know the whole market drops by 50% every 20 years (or so).

You could diversify out to other asset classes, such as commodities and bonds.  I see conflicting points here.  If you're spooked by volatility, then holding a mix of stocks/bonds/commodities is probably the right thing to do.  The counter argument is that unless you're retired (or close to it), diversifying out to other classes will leave you to underperform the market in the long run.  Imagine a 50:50 (stocks:bonds) portfolio.  Much more stable, but will also dramatically underperform a 100% stock portfolio over 20/30 years.

Let's look at our options beyond hedging.

*Asset Timing*

One advantage of a medium term trader is the ability to swap assets.  You can switch heavily into gold/bonds/property, or heavily into a specific sector (shares) that is outperforming the rest of the market.  It has the advantage of not being dragged down by holding lesser performing assets (like bonds) 100% of the time.  But there's the timing risk.  If you don't time it right, you may end up underperforming a simpler buy-and-hold approach.

*Stop-losses and Technical Exits*

I think any price-based (technical) strategy benefits from protecting yourself against a falling stock.  I'll include stop-losses and exits based on hitting moving averages or resistant levels, etc here: they're all trigger when there's a significant price drop.

If you don't use price protection, then you're probably a buyer-and-holder or a value investor (greedily buying on the dips).

Stop-losses allow you to take a modest loss to avoid the potential of a bigger loss.  And if your stop is gapped over or blown through (which definitely happens), I think you need to jump into the market and sell out anyway.  Otherwise, don't have a stop-loss if you're not prepared to enforce it.

The downside of stops is when the share that you've just sold, suddenly turns around and fully recovers its price.  I'd still argue a stop is important, because for every share that recovers, there's probably another three that continued to drop, and your stop-loss saved you from holding those.

The other downside is 'death by a thousand losses'.  Your stop-losses work as intended, but in a volatile market, you're frequently whipped out, and you have a string of modest losses.  Those losses add up. One remedy to this is setting looser stops. But if a share drops significantly, looser stops cost you a lot more.  You could have stopped out of that falling share much earlier.  That's why I don't think there's ever a "perfect" stop.


----------



## Zaxon (7 August 2019)

CBerg said:


> I want to own a stock to capture the current & future business earnings. Provided the underlying business/assets aren't impaired than price can go up & down all day.



While a perfectly valid position, as the context of this thread is that of a medium horizon, I'll raise a counterpoint.

Let's use CSL as an example. It's had an amazing run for years, but in the last 12 months, it has basically gone sideways.  There's hundreds of shares that have outperformed CSL of late and you could be holding one of those.  A medium term trader has the option of getting off "stalled" shares, and following the ones which are actively increasing in price.  (Whether that's a better strategy than buying and holding quality stocks in the long run, depends on many factors).


----------



## Zaxon (7 August 2019)

Smurf1976 said:


> My view is to always consider that whilst the market as a whole will not go zero, any individual stock can in practice lose most or all of its value if things go badly wrong.



Very true.  Which speaks to diversifying to a number of stocks, rather than concentrating on just a few. 


Smurf1976 said:


> Stops are fine as a concept but no guarantee you're actually getting out at that price. Personally I view them as being a bit like planning an outdoor event based on a location's long term weather records. Just because statistically it's unlikely to rain on any given day in January is no guarantee that it won't rain on the day of your event. Choosing to hold it in Summer has reduced your risk but not eliminated it - worst case you could still end up with a flood. Plan accordingly.



I like that analogy a lot!  Well worded.  Stops tip the balance of you being protected in your favour, but are never a guarantee that any individual stock won't cause you a significant loss.


----------



## aus_trader (7 August 2019)

Agree with the enforcement of a Stop Loss. Whether it's a SL placed in the market or a mental SL based on the tolerance for maximum you are prepared to lose, once that threshold is breached it should be executed even at a much worse case scenario than anticipated due to gaps/slippage/wide spread etc.

Zaxon, mate when you get a chance could you please start a thread on market sectors and how it affects stock selection. I think due to thought provoking wording you use, there is a lot of interest in the question threads you initiate. So word it how you like it to get maximum discussion happening and I am sure all the ASF members will benefit including myself. 

To help you formulate the question, here is the background: Certain sectors run hotter than others at any given time in the markets e.g. now it might be Gold stocks, a little while back it was biotech's and before that it was banks and financial stocks including BNPL type fintech stocks. We don't have to know the exact reason, it may be due to funds management rotating from sector to sector or some economic reason such as flight to safety or yield but we know that this is undeniably a characteristic of the market. What will be good to find and discuss is *how do the experienced/professional investors/traders find the hot stocks in the hot sectors ?* Is there a recipe/scan to use or is it through doing a lot of stock research like I do and realising that certain stocks are getting attention e.g. it could even be very specific niche segment of the market e.g. Cannabis stocks within Biotech space or Lithium stocks within Mining space etc.

Finally why is this important ? Well let's not kid ourselves, we are all here to make a bit of dough right. Few members may be far too well off and only visit to discuss politics and health . As for the rest of us, we want to know which sectors are moving right? If we have ten stocks from different sectors that have the same setups based on TA/FA which ones would you choose? I know from experience if you pick the few in the cold sectors they'll go sideways or even lose you money but if picked from the leading (hot) sectors they have a much better chance of galloping along to higher ground. Without having the insider knowledge of where the fund managers and institutions are targeting, how do we target the winning sectors ? Let's get the discussion started on another successful Zaxon thread.


----------



## Smurf1976 (7 August 2019)

aus_trader said:


> If we have ten stocks from different sectors that have the same setups based on TA/FA which ones would you choose? I know from experience if you pick the few in the cold sectors they'll go sideways or even lose you money but if picked from the leading (hot) sectors they have a much better chance of galloping along to higher ground. Without having the insider knowledge of where the fund managers and institutions are targeting, how do we target the winning sectors ? Let's get the discussion started on another successful Zaxon thread.




I'll just add my half a cent that I think that's a very good point and one that's widely overlooked.


----------



## aus_trader (7 August 2019)

Smurf1976 said:


> I'll just add my half a cent that I think that's a very good point and one that's widely overlooked.



Thanks for the support. It's these kind of overlooked areas that can give us an edge in the markets than just churning the account buying and selling any odd basket of stocks. We have to find the potential winners amongst the ordinary with any tools/techniques we can find.


----------



## ducati916 (7 August 2019)

Sectors [US market]

https://finviz.com/groups.ashx?g=sector&v=210&o=name

jog on
duc


----------



## aus_trader (7 August 2019)

ducati916 said:


> Sectors [US market]
> 
> https://finviz.com/groups.ashx?g=sector&v=210&o=name
> 
> ...



Thanks Duc, I would like similar information on the ASX sectors when we dig deep into this topic.


----------



## Smurf1976 (7 August 2019)

aus_trader said:


> Thanks for the support. It's these kind of overlooked areas that can give us an edge in the markets than just churning the account buying and selling any odd basket of stocks. We have to find the potential winners amongst the ordinary with any tools/techniques we can find.




In the past I've used a sector approach. That is, choose a sector(s) based on in my case FA and then just buy either the top 10 stocks in that sector or, if there aren't 10, everyone who's a significant player without any real emphasis on individual stocks as such.

In that case I was taking a very narrow definition of it. Eg "airlines" not "transport" or "supermarkets" not "retail". etc.

The potential would seem to be to combine strategies. Pick a sector based on FA or TA and then carefully pick stocks within that sector(s) based on FA or TA.

Potentially that could combine different approaches. Eg pick the sector(s) based on FA and the stocks based on TA. Or pick the sector(s) based on TA and then do FA to find who's got the best business within the sector. Etc.


----------



## Zaxon (7 August 2019)

Sector chat can now move to the newly created thread: https://www.aussiestockforums.com/t...re-you-a-loser-or-one-of-the-cool-kids.34858/


----------



## Zaxon (7 August 2019)

So far nobody has addressed my original question #2.  If every share only puts as risk 1% of your capital, but then if the entire market drops you're actually risking 20% (or insert figure here), is there a way around that, without being overly cautious and hurting your opportunity of future returns?

I believe short term traders do something like this.
1. Buy share ABC with a risk of 1% of capital
2. (If that share hits a stop-loss, rinse and repeat with another share)
3. Should ABC go above break even, consider you now have no money at risk.
4. You can now buy share DEF at 1% risk, while holding share ABC "risk free", and still consider yourself to be at 1% risk in total.

While that type of thinking can work for shorter term traders, I'm not sure if that makes sense if we're talking about holding shares for months (medium term), and you've had a 50% run up on one of your shares.  Because you're then talking about the % drop from your current portfolio value, rather than your original entry value.  Still, I'm wondering if position traders can learn something from short term traders about risk management.


----------



## tech/a (7 August 2019)

Zax
This would depend on how long you have been in the market and if all
of your holdings blew out below your stop.
If you'd just opened 20 positions then perhaps this could happen.

But for a long traded portfolio your going to get hit x % on possibly both open profit and
perhaps some stops.

The earlier we can recognize a sustained move down then the less chance we have of
depleting large swathes of money.
Sometimes you'll be right other times wrong.

I personally think that Systematic Traders need to have in place something that recognizes 
a change in data that is big enough to affect long long term results V those tested.
But it will become part of the data which your method will be constructed from.
This is why systems which are not continually learning form data often eventually fail.

Discretionary ---well you are at your own discretion! You'll be right and wrong.

I don't think you can avoid some loss---but you maybe able to diminish maximum 
loss in this case 20%


----------



## Zaxon (7 August 2019)

tech/a said:


> If you'd just opened 20 positions then perhaps this could happen.



I'm growing more to believe that even longer term position traders need to factor portfolio heat into their thinking, not just share specific risk management.  It does mean you could spend some significant time with large chunks of your portfolio in cash, waiting on each individual position to break even to allow you to open a new one.  I would imagine there's some opportunity cost there if you were in a strong bull market.  But I guess what you miss in initial opportunity, you make up for when the market crashes and you've limited your total portfolio loss.


tech/a said:


> The earlier we can recognize a sustained move down then the less chance we have of
> depleting large swathes of money.
> Sometimes you'll be right other times wrong.



For sure.  This is where the "timing the market" from our other thread comes into play.  If you detect a downward market, you can save yourself a lot of pain.


----------



## tech/a (7 August 2019)

Zaxon said:


> For sure. This is where the "timing the market" from our other thread comes into play. *If you detect a downward market, you can save yourself a lot of pain*.




Hmm I don't think its that easy.

But the question is *at detection* how far is the market going to fall?
How early or late do you make that call.
Hind site will be your judge.


----------



## kahuna1 (7 August 2019)

Pain ....

its part of the market.
Whilst its not a good time to speak about it, right now we are in somewhat a new world.
In a nutshell, for the first time in a very long time we have our rates at 1% and USA above it at 2%.
For years and years, USA dividends sucked at 1.5% or 2% .... now at 1.88% ours miles above that.
Add to this the franking credits, the 4.5% is up around 5.5% .

Do I expect the rate scenario as we have it, ours low and staying low to change ? NO.
Having money earning if your lucky 2% in a term deposit, verses 5.5% makes TIME and buying into dips your friend.

Same as always.
Whilst I do not like the global outlook and from time to time flick a lot of stocks, its to buy them back as they loose their shine. Conversely, sectors at times go nuts. An by nuts I am speaking ASX top 100 stocks and we see sometimes them shed idiotic amounts verses the overall market, then at times, in the blink of an eye they put back on the 10-20% to the other side of fair value.

Banks, whilst yes a royal commission, they did it twice this year, magic slumps and rallies of 20%.
Infrastructure late last year was in shreds, now its 20% or so higher. Consumer staples and COL and WES looked shocking, now its love love love.

As things go up, my own form of risk management is to take some of the risk off the table and when we see as we do, a periodic correction of 8% or more, then its time to shop and load back up.

Whilst we have NOT as yet seen an 8% correction off the massive rally from Dec 2018 to recent Highs, we are getting close.

No way of course to avoid the OPPORTUNITY cost of holding verses the highs of a few weeks ago verses now. Then again, one MUST ignore it in any portfolio.

It depends on what your trying to do ? Trade ? Invest ? Dividend income ? Retirement ? 
Tweaking in and out with say a tiny margin .... 10% leverage ONLY to be used when a big 25% plus correction occurs and then shedding 25% going 25% cash can and does have a profound impact longer term.

Going 100% cash or close to it, opportunity cost is dividends and say 2.75% each 6 months has to be taken into account. The highs and lows also are at times insane for some stocks and slowly slowly OUT and so too entry back in .... the GAP ... between selling and buying a decent investment grade stock SHOULD be 10% or more. 

OF course, it rarely happens a total washout like the GFC or say dot com mania, avoiding some or a lot of say a 15% correction with MORE than 25% in cash difficult. ONE needs an essential ingredient as to WHY .... why you go to more cash and that's a CATALYST. Not some kooky theory that the sun is going to explode. 

Markets will always overreact on both the TOP and the bottom. 
CATALYST ... mainly revolve around interest rates, goverment spending, tax and of course credit issues. Others and ones to really fear are WAR and of course currency collapse or crisis.

Cant see any of them right now, have been concerned about USA debt for a long time and its quality sucks. It needs funding and this trade war, well, nations with trade surplus and savings are the ones Trump is attacking. 

As always interesting times.
Hope some of this makes some sense, trading in and out on some assets, buying out of love sectors and selling those that are on fire if needed.


----------



## Zaxon (7 August 2019)

tech/a said:


> Hmm I don't think its that easy.
> 
> But the question is *at detection* how far is the market going to fall?
> How early or late do you make that call.
> Hind site will be your judge.



Yes.  It's "how long is a piece of string" territory.  But as traders, we time stocks all the time.  That's our job.  We hope that the mistakes on the downside add up to less that the profits on the upside.  

In theory, cutting off falling markets quickly, and letting rising markets run, should have the same positive expectancy.  Whether it does in practise depends on how you execute it.


----------



## aus_trader (8 August 2019)

Back to Risk Management on this thread and there's a lot of useful information in terms of Stop Losses, Market timing etc.

Not putting too much into any individual stock is also a good way to avoid getting 'stumped out' (cricket term). This is something that was also mentioned earlier in the thread:



Smurf1976 said:


> My view is to always consider that whilst the market as a whole will not go zero, any individual stock can in practice lose most or all of its value if things go badly wrong.




A very recent example is Rural Funds Group (RFF), which is in a Trading Halt and will be interesting to see how it comes out of it once the market opens...




It's the type of stock I would have considered, so although I do not hold RFF in my portfolio I could have easily bought in, as I didn't find anything alarming when I researched it.

So spreading the capital across a number of stocks is a great idea in terms of risk mitigation, as mentioned:



Smurf1976 said:


> In the past I've used a sector approach. That is, choose a sector(s) based on in my case FA and then just buy either the top 10 stocks in that sector or, if there aren't 10, everyone who's a significant player without any real emphasis on individual stocks as such.


----------



## Zaxon (8 August 2019)

aus_trader said:


> Not putting too much into any individual stock is also a good way to avoid getting 'stumped out' (cricket term).



Agreed.  They say diversification is the only free lunch, which is true to some extent.  What do you believe is the sweet spot for the number of shares you should hold?


aus_trader said:


> A very recent example is Rural Funds Group (RFF), which is in a Trading Halt and will be interesting to see how it comes out of it once the market opens...
> It's the type of stock I would have considered, so although I do not hold RFF in my portfolio I could have easily bought in, as I didn't find anything alarming when I researched it.



Ouch!  What a fascinating example: perfectly flat, and then it falls out of the sky.  And RFF is a $455M company, so it's no microcap.


----------



## tech/a (8 August 2019)

aus_trader said:


> Back to Risk Management on this thread and there's a lot of useful information in terms of Stop Losses, Market timing etc.
> 
> Not putting too much into any individual stock is also a good way to avoid getting 'stumped out' (cricket term). This is something that was also mentioned earlier in the thread:
> 
> ...




A trailing stop would have minimised loss say at $2


----------



## aus_trader (8 August 2019)

tech/a said:


> A trailing stop would have minimised loss say at $2




Yes since it didn't gap down when it crashed.

Or you could sell on market around that price with the massive recovery when it came out of the Trading Halt today. What a wild ride for shareholders of this stock !


----------



## aus_trader (8 August 2019)

Zaxon said:


> Agreed. They say diversification is the only free lunch, which is true to some extent. What do you believe is the sweet spot for the number of shares you should hold?



In my opinion, at least 20 different positions when fully invested.

That way if one goes bust that is a loss of 5% of the portfolio, if equal position sizing used. Not pleasant but recovering 5% in your portfolio is a lot easier than recovering say a 50% chop.

Try to remember that it takes a 100% return (doubling of the existing funds in the portfolio), just to get back to what you started with (to Break Even) if you lose 50%.


----------



## tech/a (8 August 2019)

Some settlement to go.
Im sure the bottom of this move will be tested.


----------



## Zaxon (8 August 2019)

aus_trader said:


> In my opinion, at least 20 different positions when fully invested.
> That way if one goes bust that is a loss of 5% of the portfolio, if equal position sizing used.



I'm a big fan of 20 as well.  They say 15-30 positions is ideal.  And it's said that any more than 30, and you may as well just own an index fund.


----------



## aus_trader (8 August 2019)

Zaxon said:


> I'm a big fan of 20 as well.  They say 15-30 positions is ideal.  And it's said that any more than 30, and you may as well just own an index fund.



True and agree.


----------



## aus_trader (8 August 2019)

tech/a said:


> Some settlement to go.
> Im sure the bottom of this move will be tested.



Yes, management doing everything they can to make things look rosy as I was reading the announcements that came with the lifting of the Trading Halt this morning.

But why was the stock punished so badly in the first place i.e. before being put on a Trading Halt to stop the blood shed ? So I agree with you, I think there is more to this story than a swift recovery and back to normal...


----------



## ducati916 (10 August 2019)

Zaxon said:


> Agreed.  They say diversification is the only free lunch, which is true to some extent.  What do you believe is the sweet spot for the number of shares you should hold?




Hardly a free lunch, but diversification is really your only real protection. So true diversification would look something like this in no particular order:

Employment/Physical Gold/Silver/Land with enough to grow/graze + water supply/Financial instruments.

There are probably some additional ones that could be added.

Risk and uncertainty are different. Risk is where you can calculate the probabilities mathematically. Uncertainty is the unknown future where calculations are inappropriate.

jog on
duc


----------



## willoneau (10 August 2019)

aus_trader said:


> In my opinion, at least 20 different positions when fully invested.
> 
> That way if one goes bust that is a loss of 5% of the portfolio, if equal position sizing used. Not pleasant but recovering 5% in your portfolio is a lot easier than recovering say a 50% chop.
> 
> Try to remember that it takes a 100% return (doubling of the existing funds in the portfolio), just to get back to what you started with (to Break Even) if you lose 50%.



With 30 positions your risk drops to 3.3% and usually only fully invested when in bull move and with a ISP that 3.3% is usually much lower, per stock held. So even if you put your stop at 50% of purchase price then the risk will be 1.7% of your total capital.


----------



## Zaxon (10 August 2019)

ducati916 said:


> Employment/Physical Gold/Silver/Land with enough to grow/graze + water supply/Financial instruments.



That's quite a list.  OK.  Let me jump in and put my slant on it.  I see employment as highly unstable.  Unless you're a nurse or some other stable profession, businesses love restructuring and shedding staff.  

I'm not much of a prepper.  Personally, I'd expect I will grow old and die before I see the collapse of civilization where I'd need to live of the land.

So my hypothetical risk management list would go in order: lots of passive income so I don't need to work / adult children living in the same town as me who want to look after me when I get old / (or if no kids) then enough passive income to hire a live-in nurse / finally, a good job (temporarily, since I need to get all that passive income).


----------



## Zaxon (10 August 2019)

willoneau said:


> With 30 positions your risk drops to 3.3% and usually only fully invested when in bull move



Yup: 3.3% .  Which is a nice position to be in if a stock goes completely bust.


willoneau said:


> and with a ISP that 3.3% is usually much lower, per stock held.



ISP?  I'm presuming you're don't mean Internet Service Provider here.


willoneau said:


> So even if you put your stop at 50% of purchase price then the risk will be 1.7% of your total capital.



That's right.  You could be much more lenient with your stops due to the small positions you're holding.  It certainly has its upsides, should you want to manage 30 positions.


----------



## ducati916 (10 August 2019)

Zaxon said:


> That's quite a list.  OK.  Let me jump in and put my slant on it.
> 
> 1. I see employment as highly unstable.  Unless you're a nurse or some other stable profession, businesses love restructuring and shedding staff.
> 
> ...




1. True, and that would be a qualification of employment, in that you try over time to eliminate that risk, or at least manage it as best you can. Self-employed still [generally] require clients.

2. A collapse of civilisation is extreme. How about extreme drought conditions? Some form of biological pestilence? Extreme fluctuation [higher] in energy prices or loss of generation?

3. Collapse of the currency? Hyper-inflation. Dramatic fall in rental incomes, dividend streams, defaulting loans, etc due to economic contraction.

Then looking at markets: global diversification as opposed to all-in a single bourse. Returns around the world have been quite different through the decades.

Diversification of strategies: Skate may shed light on this or Tech/A, but when [if] there is a prolonged bear market, how does a long only strategy fare?

Diversification should mean that your portfolio is uncorrelated. You should always be doing badly somewhere. Then, if the wind changes, that performance may [should] also change.

jog on
duc


----------



## Zaxon (10 August 2019)

ducati916 said:


> Then looking at markets: global diversification as opposed to all-in a single bourse. Returns around the world have been quite different through the decades.



I'll bring this discussion back to focusing specifically on investing.  

The bourse risk is interesting.  We saw what happened in Japan.  The assumption is that this wouldn't happen to the US, because historically the US hasn't stalled relative to the other bourses.  Whether that will remain true in the future remains to be seen.

Historically, "total world" ETFs have underperformed US only ETFs, so it's trading performance for diversification.  I guess that comes down to what the individual wants out of their investments.


ducati916 said:


> Diversification of strategies: Skate may shed light on this or Tech/A, but when [if] there is a prolonged bear market, how does a long only strategy fare?



Running multiple, we'll call it "less related" strategies, such as short term trading and long term buy-and-hold, is definitely an area overlooked by most people.  And definitely something worth discussing further.  How many investment strategies do you run for shares?


ducati916 said:


> Diversification should mean that your portfolio is uncorrelated. You should always be doing badly somewhere. Then, if the wind changes, that performance may [should] also change.



A lot of assets we hold aren't as uncorrelated as we'd like.  If you hold a diverse group of shares, there's so much correlation in the market, it's really not diverse at all. How many asset classes do you hold personally?


----------



## ducati916 (10 August 2019)

Zaxon said:


> I'll bring this discussion back to focusing specifically on investing.
> 
> The bourse risk is interesting.  We saw what happened in Japan.  The assumption is that this wouldn't happen to the US, because historically the US hasn't stalled relative to the other bourses.  Whether that will remain true in the future remains to be seen.
> 
> ...




1. You can hold ETFs specific to countries, or buy stocks in individual countries themselves [multiple accounts], which is a truer form of diversification.

2. I have run in the past many. Currently and for a number of years now, just a single strategy.

3. From my previous list, all of them and a couple in addition, viz. collectibles: art, motorcycles and first editions.

jog on
duc
duc


----------



## willoneau (10 August 2019)

Zaxon said:


> ISP? I'm presuming you're don't mean Internet Service Provider here.



initial stop loss , guess it should have been ISL


----------

