Risk Management

[Zaxon]

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.

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]

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]

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]

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]

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:

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:

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]

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?

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]

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 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...

View attachment 96649

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:

A trailing stop would have minimised loss say at $2

 

[aus_trader]

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]

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]

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

 

[Zaxon]

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]

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]

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]

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]

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]

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]

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.

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.

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]

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.

2. 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.

3. 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).

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]

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.

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?

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]

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. 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.

2. 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?

3. 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?

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