As from April 2013 my Journey in Investing is to create Retirement Income for Life till 85 years old in 2041 for two persons over market cycles of Bull and Bear.

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This blog is authored by an old multi-bagger blue chips stock picker uncle from HDB heartland!

"The market is not your mother. It consists of tough men and women who look for ways to take money away from you instead of pouring milk into your mouth." - Dr. Alexander Elder

"For the things we have to learn before we can do them, we learn by doing them." - Aristotle

It is here where I share with you how I did it! FREE Education in stock market wisdom.

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Value Investing
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Saturday, 12 March 2011

Portfolio Management - Portfolio Risk (2)

What does Japan Quake tell you something on risk management on your portfolio?

No matter how good you are with your TA or FA or both. You still must at all times protect your portfolio against Black Swan event that may happen and causing big losses to the portfolio. It is lot harder to recover from big losses in the portfolio.

In Joel Greenblatt's brilliant book, "You Can Be a Stock Market Genius", he provides the following statistics by owning the following number of stocks:

  • 2 stocks eliminates 46% of non-market risk of just owning one stock
  • 4 stocks eliminates 72% of the risk
  • 8 stocks eliminates 81% of the risk
  • 16 stocks eliminates 93% of the risk
  • 32 stocks eliminates 96% of the risk
  • 500 stocks eliminates 99% of the risk
Read? Portfolio Management - Portfolio Risk

My risk management rule is based on Investing Capital and not at Portfolio level so that the risk exposure is actually quite consistent and independent of the stock market conditions.

I will keep my risk exposure to not more than 5% of Investing Capital for any single stock and not more than 10% to a sector. For long-term holding for capital appreciation and dividend income, I would like to take back my investing capital ASAP and only leaving behind the profits to ride with the stock market i.e. Pillow Stocks Investing strategy.

"Think of Risks before Profits, then you are more likely to be safe over long run." - Createwealth8888

1 comment:

  1. Hi CW8888,
    Well put:- "Think of Risks before Profits, then you are more likely to be safe over long run."

    Here are some advice by B. G. & Dick Davis.

    “The Essence of Investment Management is the Management of Risks, not the Management of returns”, Benjamin Graham.

    “Therefore Proper Allocation of Assets and Entry Level are the 2 most crucial actions.
    Nothing you can do is better to Control Risks and Generate profit,” Dick Davis.

    But the trouble is sometime our emotions over-rule our IQ and most of the time when it happens because "success has gone into our head".(If it's greed then it will be worse.) That's when we let our guard down. At that moment, we think we are heroes or super smarties, though actually, we don't really know what we are doing.
    Ha! Ha! Beware & Be careful.
    Recently, do you have too much success?


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