Posts tagged with: Risk Management

Are you ready for the next financial crisis?  No one knows for sure when the crash will happen, but here are some sensible steps everyone should take to keep from being caught off-guard when it does.  I also tell you what signs to look for that will foreshadow the next crisis, so you can be calm and confident while others panic.

 

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Bunker

(CC image by Psaiko on Pixabay.com)


Section 1: What Will the Next Crisis Be Like?

A brief review of the last few major financial crises

Signs and signals to watch for, this time around


Section 2: How to be Safe During Normal Times

Cash

Diversification

Alternative assets

Hard assets

Know your goals and risk tolerance, and keep your assets in alignment with them

Multiple income streams

Preparedness outside of the financial world


Section 3: Getting Defensive When Risk is Elevated

Move to a conservative asset allocation, as I have already done with my own assets

A little-known tactic to avoid getting trapped within your retirement account

Protecting a portfolio using options without selling the stock

What to sell

What not to buy


Section 4: What to do When the Crisis Arrives

From smoke to fire: The stages of a crisis, and the actions you should be taking in each

Embrace risk as others are becoming the most fearful of it

Follow trustworthy news sources; stay away from mainstream media as much as you can


References

Episode 15: How to Get a Return on Cash

Washington Post (April 2, 2007): Huge mortgage lender files for bankruptcy

The Survival Podcast – rational preparedness without the prepper mania

ZeroHedge – Why the Fed is Trapped: A 1% Increase In Rates Would Result In Up To $2.4 Trillion Of Losses

Battery1234 – Steven Harris’s website on how to make your own home battery bank for emergency power


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Newsflash: If a financial advisor or fund manager brags to you about “beating the market”, it’s NOT what you want to be hearing right now!  In this episode, I debunk the popular myth that you should be trying to “beat the market” when times are good.  I also lay out the questions you must ask instead when evaluating a mutual fund or investment manager.  Don’t get caught chasing high-beta strategies after one of the longest bull markets in history has already unfolded.  Investing and trading are contests of endurance, not of raw speed.

 

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(CC image by trailersoftheeastcoast on Flickr)

 


Section 1: Today’s Market in Historical Context

  • There are bull markets, bear markets, and range-bound markets
  • Long-term chart of the S&P 500


Section 2: The Unpleasant Truth: How Mutual Funds and Managers Beat their Benchmarks

  • Cherry-picking returns
  • Sketchy math
  • “Marking the close” – see Resources section below
  • Leverage
  • High-beta stocks
  • Illiquid portfolios
  • Lack of diversification
  • Asymmetric risk profiles
  • Very few: superior management
  • Focus on how they did during the more challenging years in the market
  • Size of fund: rapid growth can limit future opportunities

Section 3: The Questions to Ask Instead


Section 4: The Real Way to Beat the Market Over the Long-Term


Resources

Study: Mutual Fund Managers “Mark the Close” to Manipulate Quoted Returns

Mutual Funds & Performance Manipulation

 

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(Wrap-up of ten-part series on Financial Truths)

In this episode, I tie together all the concepts I’ve introduced throughout this 10-part series on financial truths.  I illustrate a few different asset allocation ranges that will position you for profits and preserve your capital so you can trade for many years ahead.

Pick one of these asset allocation ranges that best suits your goals and risk tolerance, then just make sure your portfolio stays within the ranges at all times.

This process works for long-term investors in a 401(k) or IRA, as well as those with short-term trading accounts.

 

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Important disclaimers to review

Check out this page for my latest baseline asset allocations.

Download the free asset allocation workbook (Microsoft Excel format) by signing up for free email news and updates.  You will receive a link to download the file immediately upon confirming your email subscription.  You can unsubscribe at any time if you wish.

 

Calm

(CC image from Joe on Flickr)

Section 1: Financial Truths for Traders & Investors

  • Review of the series (find prior episodes here)
  • Why I chose the topics I did
  • How it’s different than what many others teach

Section 2: Take Action

  • A flexible asset allocation framework
  • Start today with the spreadsheet
  • Find the row that best suits you:
    • Choose one of the four categories based on how active you want to be
    • Move to the right side of the table.  Look at the annual loss section, with the 1-in-20-year, 1-in-10-year, and 1-in-5 year loss amounts: which row matches most closely with your personal risk tolerance?
    • Go to the right side of the worksheet and select that row from the drop-down box.  Those will be your asset allocation targets.

Section 3: Not Quite Right?  Here’s How to Adjust

  • Found the closest fit, but want to reduce the risk?  I explain how.
  • Found the closest fit, but want to take on more risk?  I explain how.

Section 4: The Next Level

Section 5: Make Sure You Stay on Track

  • Calculate and monitor your asset allocation
  • Calculate “asset exposure” for each investment or trading position you own
  • Add up the asset exposure by asset class (simple investment universe) or subclass (detailed investment universe)
  • Note: If you are using a highly leveraged strategy, use total assets in the denominator instead of asset exposure

 

 

 

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Don’t Let Mental Mistakes Sink You

(Part 8 of ten-part series on Financial Truths)

Section 1: We Are All Human

Section 2: Play Devil’s Advocate

Section 3: Forget Your Cost Basis

Section 4: You Can’t Tell the Market What to Do, So Let the Market tell YOU What to Do

Section 5: Stop-Loss Orders Are Only For the Lazy

Section 6: Know When to Take a Break

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trophy case

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Section 1: We Are All Human

  • No ‘bot’ or ‘algorithm’ can come close to what a good investor/trader can achieve
  • Some high-speed trading firms do succeed, but have to spend many millions of dollars on computers and network connections to do it
  • ‘Flash crashes’ highlight the problems with pre-programmed trading algorithms
  • 2016 British Pound Flash Crash

    New Market Wizards by Jack D. Schwager

Section 2: Play Devil’s Advocate

  • Before placing a trade: visualize the market moving against you, what would that look like?
  • Could you construct a plausible alternative scenario around this?

Section 3: Forget Your Cost Basis

  • It doesn’t matter where you entered the trade
  • Don’t hang on to a losing trade because you want to “get back to even”
  • One exception: a “time-out” level based on total losses

Section 4: You Can’t Tell the Market What to Do, So Let the Market Tell YOU What to Do

  • Examine a chart without bias
  • Markets aren’t tradable 100% of the time

Section 5: Stop-Loss Orders Are Only For the Lazy

  • Stops often don’t work the way they’re supposed to
  • Other traders will exploit your stop-loss orders for their profit – “running the stops”
  • Don’t react too quickly to a breach: Watch the action around the price level
  • “Fake-outs” around commonly-known price levels

Section 6: Know When to Take a Break

  • Thinking too much about past mistakes
  • Being tempted to “double-down”
  • Exceeding a pre-defined risk tolerance

 

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