Dividend Investing Ideas Center
Have you ever wished for the safety of bonds, but the return potential...
Stoyan Bojinov Apr 16, 2015
It’s dangerously easy to be lulled into a false sense of security when equity markets are chugging along higher; and especially so when they have done just that for the past six years in a row.
Few people give thought to risk management when the winds are the markets’ back. However, this tendency is the root for irrational and damaging investment decision making. After all, sooner or later, there will be a steep and swift correction that catches most off-guard, and those without a risk management plan are going to pay dearly in every sense of the word.
We’ve preached the importance of having (and following) a clearly defined asset allocation strategy. Equally important, and just as overlooked, is having a clearly defined risk management plan.
What’s just as dangerous as not having a risk management plan is following one that is inherently guided by misconceptions. In an effort to aid investors in developing a meaningful strategy to protect their capital when the next bear market hits, and it will, we’re taking a page from Ben Carlson’s book, a respected finance blogger and seasoned portfolio manager.
In his recent post, Three Misconceptions About Risk Management, Ben points our attention to three of the most common, and might I add dangerously so, misinterpretations of what risk management really entails. Below is a summary of these misconceptions:
Be sure to read Why We Prefer Bottom-Up Analysis.
As Ben puts it, “The best a risk model can do for the investor is point out where potential areas of risk exist, not how that risk will manifest and play out.”
If you haven’t already, ask yourself this – what will I do when the next bear market rolls around? Mental preparation is absolutely necessary if you wish to avoid irrational decision making during tumultuous times on Wall Street. Do not fall victim to your own emotions, instead, outline a plan for yourself for how to deal with the worst case scenario so if it does occur you’re not left scrambling or running for the exit along with the rest of the herd.
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