~Risk Posture~


Winter Mountaineering exposes climbers to various risks, some calculable and some incalculable. Calculable risks, like the probability of pursuing an unnavigable route or a slip and fall on steep terrain, can be managed with planning, conditioning, and technical advantage, while incalculable risks, like an avalanche or a crevasse fall, are largely unmanageable and must be accepted by the climber. Investing, like mountaineering, involves numerous proven hazards which must be identified and mitigated, as well as incalculable risks to be acknowledged and accepted. Is investing worth the risk? Why do great investors identify risk management as the indispensable component to successful investing? What are the considerations and methods of studious risk management? 

Famed investor, Doc Eifrig, of Stansberry Research, says “owning the stocks of profitable businesses is the greatest wealth building tool on earth”. Jim Rogers, Warren Buffet, and Jeff Besos would all agree. In a near-zero interest rate, high inflation world, the alternative to having, at minimum, a small amount of stock exposure, and, therefore, assuming the associated risk, is a large guaranteed annual loss in the purchasing power of all savings and investments, the only material measure of your financial worth! Yes, the risk of owning stocks is “worth it”, on certain terms.

Warren Buffet states the two most important rules of investing are 1) Never lose money, and 2) Never forget rule number one. Mr. Buffet strongly recommends that you assume risk, and that you dutifully manage that risk. Stanley Druckenmiller, Steve Sjuggerud, Howard Marks, and other legendary investors identify ‘the avoidance of a catastrophic loss’ as the single most important principle to investing. No mountaineer would disagree, and King Solomon, a wealthy man with much to lose, inferred as much in Ecclesiastes 11:2, when he said, “Give a portion to seven, or even to eight, for you know not what disaster may happen on earth”.

General means of risk management include the following:

  • Diversify equity holdings across multiple companies and sectors.

  • Dollar cost average into a diversified stock fund constantly.

  • Never over-pay for any security.

  • Keep leverage on your investments to a minimum.

 It should be understood investment return, and, therefore, risk of loss, is driven primarily by asset allocation (to investment types and industries), not security selection. Consider the following as you formulate your own ‘normal’ risk posture:

  • What resources do you have to meet future income needs?

  • How adequately will those resources meet the need, given conservative inflation and rate of return assumptions?

  • Where are you in the life cycle of inflows and outflows?

  • What aspirations do you have that involve spending?

  • What is your emotional ability to withstand market volatility?

   *Note that an investor’s risk posture should be based primarily on resources and financial status, not on emotions or sentiment, which, though factored in, must always be scrutinized, and often overruled.

Finally, once the ‘normal’ risk posture is ascertained, decide whether your allocation will remain in the ‘normal’ range throughout the various phases of the market cycle, or whether you will ‘lean’ in one direction (i.e.; offense) or another (i.e.; defense) as these market dynamics play out.¹   

In short, manage risk like a mountaineer! Think about it, Shaun.   

"For God gave us a spirit not of fear, but of power and love and self-control.” ~2Timothy 1:7

 

1 Oaktree, “Insights Live: Which Way Now? A Conversation with Howard Marks”, August 9, 2022 https://www.oaktreecapital.com/insights/insight-video/market-commentary/insights-live-which-way-now

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. All investing involves risk including the possible loss of principle. No strategy ensures success or protects against loss.

Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price and does not guarantee a profit or against loss of principal.

 

 

 
 
 
 
 
 
 

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