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.

Click to email CW8888 or Email ID :

Welcome to Ministry of Wealth!

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.

Think Investing as Tug of War - Read more? Click and scroll down

Important Notice and Attention: If you are looking for such ideas; here is the wrong blog to visit.

Value Investing
Dividend/Income Investing
Technical Analysis and Charting
Stock Tips

Sunday, 27 September 2009

Protecting Our Portfolio From The Next Bear

Super Mum asked: "My concern now is to preserve my capital in case of the prolong 'bear' and become 20-30% losses. Any view on how to preserve capital?"

I think she was actually asking: "How to protect my Portfolio from the next Bear?" I believe many investors may be thinking about it too.

Market Truism: Every Bear market is followed by a Bull Market, and every Bull market is followed by the Next Bear market.

You want to ride up your portfolio with the Bull to maximize your gains and protect your portfolio from the next Bear; unless you want to leverage on the Bear to further extend your gains on the way down.

To protect your Portfolio, you may have to train yourself to look at Portfolio (i.e. Stocks and Cash available for investing) , and not just the stocks.

You need to fully understand Market Risks and Market Uncertainty, and learn to mitigate risks and to live with market uncertainty.

In portfolio management, the important thing is for you to use your knowledge and skills to forecast the general market direction; and manage your portfolio according to your plan and your personal investment goals.

So, think about what market is likely to be in 1-3 months in advance, but also know that you could be deadly wrong in your own forecast.

Higher Returns. Higher Risks. Higher Risks mean losses can be very Real.

So what are the risks?

Understanding Stock Market Risks - Updated

What is Risk?

Someone defines Risk in an abstract term:

Risk = (Probability of an Event occurring) x (Impact of the Event)

So from the simple definition above, if we are to protect our portfolio from the next bear, we have to mitigate RISKS.

We want to reduce the Probability of Event Occurring to lowest that we can really control.

One way is to diversify our portfolio with a blend of non-correlated or negatively correlated stocks so the probability of all the counters severely beaten down at the same time will be the lowest.

For example, banks and property counters are correlated, and those stocks that have Mother-Daughter relationship e.g. Keppel Corp and Keppel Land, Semb Corp and SML, etc

In another word, we need an Army of Air, Sea, and Land forces in our portfolio and also to ensure enough Reservists for mobilisation.


Diversification is the key to mitigate risks as not all stocks will fall with the same magnitude and some may even recover faster in the Bear market.

So are your current portfolio blends with non-correlated or negatively correlated stocks?

Next, we want to reduce the Impact of the Event by limiting the risk exposure of any counter to 5% of our capital and any sector to 10%.

If Lehman Brothers, 158-year investment bank, who had survived two World Wars but gone in this Bear. If one man called Nick Leeson could brought down Barings Bank, the oldest merchant bank in London . So it is best to assume that there is another Nick Leeson hiding somewhere and another one company may be facing the similar fate of the Lehman Brothers.

Finally, we want to manage the ratio of Cash and Stocks according to our market forecast and allocation plan.

Again, always remember that we could be deadly wrong in our own forecast, so be flexible and keep reviewing our strategies; but stay focus on our Personal Investment Goals and the reasons why we come to invest in the Stock Market.


No comments:

Post a comment

Related Posts with Thumbnails