Expecting Market Volatility and What To Do About It

If you need additional evidence that we are in a season of volatile markets, check out this Portfolioist article.  Recognizing that market ups and downs are not about to leave us very soon, what are some options available to investors?  How can we temper daily market moves of 2% or more?  Risk reduction is becoming more and more important.

A few days ago, I had reason to pull William J. Bernstein's book, "The Intelligent Asset Allocator" off the shelf.  Bernstein's first book continues to be one of my favorites. In the introduction, Bernstein lays out a six point Road Map for investors.  It is well worth quoting these points for ITA readers as they are general in nature and to the point when it comes to monitoring portfolio risk.  Here are Bernstein's six points and I quote.

  1. Take a deep breath, and do nothing for several weeks or months, or as long as it takes to complete the following steps.  You are in no rush to immediately and radically alter your finances.  You have the rest of your life to get your affairs in order; the time you take learning and planning will be time well-spent.
  2. Acquire an appreciation of the nature of and fundamental relationship between risk and reward in the financial markets.
  3. Learn about the risk/reward characteristics of various specific investment types.
  4. Appreciate the diversified portfolios behave very differently than the individual assets in them, in much the same way that a cake tastes different from shortening, flour, butter, and sugar.  This is called portfolio theory and is critical to your future success.
  5. Estimate how much risk you can tolerate; then learn how to use portfolio theory to construct a portfolio tailored to produce the most return for that amount of risk.
  6. At this point you are finally ready to purchase individual stocks, bonds, and mutual funds.  If you have succeeded in the above tasks, this is by far the easiest step.

Note how many of the above six points include risk.  Warnings or education related to risk is included in points 2, 3, and 5 where 2 through 5 are the critical guidelines.

Points 1 and 6 are fundamental to this blog while 2 through 5 are constantly in our risk management endeavors. If risk management and market volatility are current points of pain, what "Advil" can be taken to smooth out the rocky road.  Here are my suggestions.

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Curie Portfolio Review: 29 November 2011

These portfolio reviews roll around faster than one might expect and this morning is the time to reexamine the Curie Portfolio. Checking over the Dashboard (worksheet from inside the TLH Spreadsheet) is the first order of business.  Readers will quickly see that this portfolio needs some attention.  I've yet to make a firm decision on whether to continue allocating any percentage to mid- and small-cap blend classes.  My inclination is to change the Strategic Asset Allocation (SAA) to zero percent for these two asset classes and purchase IWN which would shift a greater percentage to small-cap value.

While it is appropriate to set up a new SAA plan, I do not anticipate buying any ETFs until they move from below to above their respective 195-Day EMAs.  Even with the nice move yesterday (11/28/2011), most of the ETFs I use are still well below their long-term EMA.

Look for some changes in this portfolio the next time it comes up for review.

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