| ADJUSTING PORTFOLIO RISK FOR SUCCESS |
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Long term successful investment in the stock and bond markets is tied to
assumed risk. Virtually everyone makes money when the level of security
prices rises. Success, however, depends on keeping previous gains when
there is a sharp drop in security prices.
Delano & Morgenroth Investment Advisers divides investable assets into two
categories: Risk Assets and Secure Assets. Risk assets are defined as
assets whose prices can reasonably be expected to fluctuate 10% or more in
any year; Secure Assets are holdings that can reasonably be expected to
fluctuate less than 10% in any year. Typical Risk Asset investments are
common stocks, high yield bonds, bonds maturing in 10 to 30 years, options,
etc. Secure Asset investments typically include cash, money market funds,
CDs, and high quality bonds maturing in 5 years or less. The strategy is to
concentrate portfolio risk in the Risk Asset category and, as far as possible,
to avoid risk in the Secure Asset securities. While this strategy is not perfect,
it has been very successful in vicious down markets. Most people prefer slow
steady growth in their portfolios to big gains followed every so often by
frightening losses.
Successful implementation of this strategy requires that the risk of each
investment is clear. It is almost impossible for an investor to understand the
risk profile of some complicated investment vehicles. Examples would be
Exchange Traded Funds (ETFs) which use derivatives to mimic a stock index
or a category of underlying stocks, bond funds that use leverage, derivatives
and lower quality bonds to produce high yields, and structured investments
that are unsecured investments linked to an index and hedged with
derivatives.
assumed risk. Virtually everyone makes money when the level of security
prices rises. Success, however, depends on keeping previous gains when
there is a sharp drop in security prices.
Delano & Morgenroth Investment Advisers divides investable assets into two
categories: Risk Assets and Secure Assets. Risk assets are defined as
assets whose prices can reasonably be expected to fluctuate 10% or more in
any year; Secure Assets are holdings that can reasonably be expected to
fluctuate less than 10% in any year. Typical Risk Asset investments are
common stocks, high yield bonds, bonds maturing in 10 to 30 years, options,
etc. Secure Asset investments typically include cash, money market funds,
CDs, and high quality bonds maturing in 5 years or less. The strategy is to
concentrate portfolio risk in the Risk Asset category and, as far as possible,
to avoid risk in the Secure Asset securities. While this strategy is not perfect,
it has been very successful in vicious down markets. Most people prefer slow
steady growth in their portfolios to big gains followed every so often by
frightening losses.
Successful implementation of this strategy requires that the risk of each
investment is clear. It is almost impossible for an investor to understand the
risk profile of some complicated investment vehicles. Examples would be
Exchange Traded Funds (ETFs) which use derivatives to mimic a stock index
or a category of underlying stocks, bond funds that use leverage, derivatives
and lower quality bonds to produce high yields, and structured investments
that are unsecured investments linked to an index and hedged with
derivatives.