One of the fundamental principles of managing portfolio risk is not losing money. Do you understand the risks we take and how you want to reduce this risk is what separates from successful investors who never earn money.

There are several types of portfolio and risk. Knowing that the risk is the first step to better investment decisions must be made.

macro risk categories

In a sense, macro, there are two types of risks. Systematic risk, also called market risk is the risk associated with the overall market. An example is the general trend of the stock market dictates a substantial portion of total return. In this case, the owners of bearer shares various sectors to diversify the systematic risk of the market.

You can the risks of routine coverage of your positions with non-correlated assets (much harder to do more than not) or stop using management techniques to reduce in order to obtain your capital. To stop are not part of modern portfolio theory, they have their usefulness and should be part of your overall strategy.

The development of interest rates, recessions and natural disasters are examples of systematic risks that affect the entire market.

unsystematic risk, also known as diversifiable risk or danger, the risk in every investment. Investors can offset the specific risk with diversification.

For example, if your money in a biotechnology company just received news that the FDA has not approved a new drug, you encountered specific risk or unsystematic. These news would cause share prices to fall.

If you owned shares of several biotechnology companies or businesses in most other industries, you reduce your risk.

In Jim Cramer’s “Mad Money” program, it has a segment called “Are you diversified?” People call and him five shares they hold in different industries. He expressed the opinion that if a sufficiently diversified portfolio. All it does is suggest how to cover the non-systematic risk. systematic or market risk portfolios remain.

Index Fund

popular S & P 500 are exposed to market risk while diversifying much of the risk of holding a particular stock or sector specific. 000 would be an S & P 500 Index Fund invests 4th January 2000 by $ 373.09 on 30th November 2009. It is acts of systematic risk or market impact had on the portfolio of the investor. The diversification of the operation of the broad S & P 500 will not prevent you to lose money. Instead, owners felt the sting of the market, while hedging techniques would be appropriate to reduce or eliminate all but the effect of losses have on the market.

The main feature

The test of a complete portfolio, it is essential to fully consider the most important factors that make up your core base of assets. Dr. David Swensen, the Nobel laureate in economics, has three essential elements that are part of your evaluation should be identified contribute to the systematic risk or market.

With the ability to cover the market risk of other assets. For example, real estate a good hedge against the effects of inflation, while bonds that offer protection against a financial crisis. In recognition of these specific features of the kernel, you may use part of the market risk inherent in an investment portfolio. It should have essentially the market-based asset class. They are only dependent increase of the active management of asset class, the risk of loss from not investing in the market. Relying on liquid markets where it now has a market and sell your asset base. Assets that can not be immediately sold and the prices are the sudden and profound loss. liquid markets give you the opportunity to use technical stop loss should the market turn against you in a recession.

your stock portfolio is part of your evaluation of the entire property that includes the reduction of an emergency, real estate, bonds, and possibly precious metals. In taking this broad perspective, you have a better chance of blankets that the global non-market correlated risk-mail address.

Asset correlation

modern portfolio theory are used, the most effective method is an optimal mix of asset classes that generate the best risk / return.

As the owner of the assets that are not correlated with each other, reduce the risk of creating your portfolio. In general, stocks and bonds tend to be correlated negatively. If the stocks well, and where the bonds are not obligations of the good results are not the stocks.

market segments have different correlation. Have areas that do not help reduce your risk is highly correlated. For example, stocks closely with her name. In this case, it is better for the sector investors not to hold the individual. Do the sector contributes to achieving some diversification, reduction of risks specific to the property.

As the owner of the asset classes that are not highly correlated, you can reduce the risk of the primary asset classes are considered.

commons bonds, equities, property funds and regions, including the United States, the European Union, Great Britain, Japan, China, India, Brazil and Latin America, Rest of Asia, the Middle East. Types of bonds, like Treasury bills, corporate short-term or long-term major currencies such as the U.S. dollar, Pound Sterling, Euro, Japanese Yen industries.

When mixing asset classes with low correlation to each other, you are reducing the risk of your portfolio. Many investors fail to think of this when they build their portfolios to integrate. Through the use of the factor R-Squared, a correlation of 1 means the asset classes are correlated perfectly. A correlation coefficient of zero means that there is no connection with the implementation of asset classes.

have For example, the S & P 500 and Russell 2000, a nearly perfect correlation of 0.97. If the average correlation between the sectors S & P 0.32.

Asset allocation is the most important factor in building a portfolio of high performance. Look for the risk of each asset class, a portfolio that the market can make in good times and bad shot.


Management of investment risks