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CASE STUDY: Reducing / Managing Risk

December 11, 2018



I wanted to give you a market update and maybe talk about some areas where you can help to reduce risk.

I was meeting with a client this last week, and we’re moving money from a major brokerage firm. And she called me today because she was all concerned that over the transfer she’s lost about $150,000. And the reason I bring that up to you is we’ve had such volatility in the markets, I think Tuesday – Wednesday and Thursday. We had a lost of 700 points in the Dow on Wednesday. And the Dow was down again 700 point on Thursday, came back.

The point is you’re talking about massive move. You’re talking about a two-day period about a 6% to 7% move. That’s not normal. We’ve not had this kind of volatility since ‘08. This October was the worst October since 2008 October. We all know what happened in 2008 and ‘09. The market was down 55%.

So what I want to talk today, a little bit, is how we manage risk. And that’s a problem. A lot of people that I see we’re doing reviews of your risk analysis. We will do a risk and fee analysis. And the risk analysis is important. I will tell you most of you have a lot more risk in your portfolios than you think. I was doing one the other day and a single client, I think she’s 67. And she was 96% stock, and her downside of her portfolio was potentially 55%.

I will tell you, on average, most of you have a loss of about 30% in your portfolio, if we go through another financial crisis. So a million dollars, $300, 000. So what do you do?

Here is a problem I think is most of you have that you’re maybe unaware of: 1)  If you’re managing your own money, what do you do? How do you adjust your portfolio? Do you adjust your portfolio? Do you have some protection built in your portfolio? 2)  If you have an adviser, unfortunately, what I see mostly is that there is no type of management of the portfolio. It’s kind of a set-it-and-forget-it. That’s dangerous.

First off, a couple of things that we can do:  1)  There’s ways to mitigate risk relative to just having assets that are outside the stock market and bond market, like real estate we use a lot of. We use annuities. So once you build a portfolio that has different strategies built in, not just stocks and bonds. You can have a much more diversified portfolio and have a lot less risk in the portfolio.

Another thing you can do, we use stopwatch strategy, which has a maximum risk of about 10%. So you can invest in the stock market, if you get down 10%, we go to bonds. Pretty simple, straight forward strategy. There’s multiple ways that we will manage risk, but my big concern is for you out there that are not our clients and are kind of what I call ‘twisting in the wind’ and concerned watching these markets that are –  really we have not this kind of volatility since ‘08. And I always said that volatility begets volatility. And what I mean by that is volatility is just common stock. It’s just not the way it is.

So if you want to reach out to me and talk about markets, talk about how to mitigate the risk in your portfolio, please reach out. I would love to sit down with you.

Thank you.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.
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