Managing Downside Risk
Many brokers, advisers and planners merely place you in an asset allocation model — 60% stock/40% bond, 70% stock/30% bond, 50% stock/50% bond. They tell you that diversifying across asset classes like stocks and bonds is the best way to protect yourself.
That’s NOT risk management.
In fact, the “pick-a-portfolio” approach resulted in extreme losses for most investors in the 2000-2002 dot-com disaster as well as the 2008-2009 financial collapse. It even crushed portfolios that had too much exposure to Europe during the region’s sovereign debt troubles in 2011.
In contrast, we are risk managers who actively guard against the possibility of big losses. That’s what risk is… the possibility of a big loss.
In fact, you can’t “diversify” or “asset allocate” or “stock pick” your way around catastrophe. You need to take specific measures to sidestep financial devastation from occurring in the first place.
At Pacific Park Financial, Inc., we use stop-limit orders to secure a big gain, small gain or small loss. We also monitor prices in relation to their moving averages. And where it is prudent to hedge, we may purchase negatively correlated positions to protect current holdings. By applying a number of critical techniques, we control the most important thing that can be controlled… the outcome of every investment decision.
Downside risk management may involve other strategic decisions as well. A stop-gain order can be employed to lock in a certain percentage of profit. More commonly, a review of all data — fundamental, technical, historical, economic — may definitively provide a reason for altering the assets in your portfolio.