investment risk mitigation strategies
TRANSCRIPT
INVESTMENT RISKMITIGATION STRATEGIES
Currency Company Inflation
Industry Liquidity Market
Risk is defined as the chance that an
investment’s actual return will be different
than expected. There are several sources of risk
to an investor’s portfolio, but also strategies
that can help mitigate your exposure.
Darrow’s Portfolio Manager, Michelle E. Wells
CFA®, outlines some common types of
investment risk and tactics to minimize your
exposure.
What isinvestment risk?
Risk Mitigation Strategies
Keep in mind that you can never reduce risk down
to zero and that risk management, as a
component of your asset allocation strategy, is an
essential tool for helping you meet your
investment objectives. The guidance of an
experienced portfolio manager can be
instrumental to minimizing risk and achieving
your long-term investment goals.
Market risk is the risk that the
entire market could respond
negatively to specific economic or
political news
MARKET RISK
Strategies to Manage Your RiskHolding higher than normal cash balances may mitigate thisrisk, though the risk of being out of the market may make thisstrategy impractical.Hold short positions to offset downward pricing pressure onlong positions in a negative market environment. The risk ofthis strategy is that the market could move up versus downand you would lose money on your short positions as theymust be covered at a higher price. Have a diversified portfolio of cash, stocks and bonds thatreact differently to various market environments.
MARKET RISK
Industry risk is the risk that a specific
industry could underperform the
overall market due to shared exposure
and to outside factors
INDUSTRY RISK
Strategies to Manage Your RiskAvoid overweighting a specific industry and instead diversifyby sector and industry.
INDUSTRY RISK
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Company risk is specific to a company
based on the company's financials,
products and/or services it offers,
strength of competitors, and other
similar factors
COMPANY RISK
Strategies to Manage Your RiskHolding a diversified portfolio of at least 20 or more stocksacross many sectors and industries would mitigate, but noteliminate, company specific risk.
COMPANY RISK
Liquidity risk is the risk a specific
investment is not actively bought or sold
in the market when a seller wishes to
trade, potentially resulting in a loss due to
the relative lack of available purchasers
LIQUIDITY RISK
Strategies to Manage Your RiskFor Marketable Exchange Traded Stocks or ETFs: Carefullyobserve trading volume and watch for wide spread differentials iftrading in large lots of stock, as adequate volume is a goodindicator of how liquid a particular stock position might be. Thesize of the traded lot for a specific security may also impact yourexecutable trading price, depending on the securities market for itand its liquidity. For Fixed Income Securities: Since there is no formal tradingexchange for such securities, it is necessary to have access toseveral bond dealers or trading houses to obtain the bestmarketable price. Fixed income securities tend to be moreilliquid, offering wider spread differentials in price. (One notableexception is the treasury market, which is generally the mostliquid).
LIQUIDITY RISK
When investing in foreign markets,
currency risk is the risk of fluctuations in
the valuation of a foreign currency
against an investor's home currency
CURRENCY RISK
Strategies to Manage Your RiskWhen investing overseas, look for mutual funds or activemanagers that hedge back to U.S. dollars to mitigate thenegative impact of unfavorable currency moves (foreigncurrency depreciation). Hedging currency risk completelyaway may remove a large portion of the return potential fromforeign investments, as an appreciating foreign currency overthe U.S. dollar can positively add to unhedged returns forAmerican investors. Focus on regions of the world in which currency movementsare more stable and predictable, which may mitigate wildswings in returns from volatile currency movements (i.e.typically more stable developed foreign markets versusemerging or frontier foreign markets).
CURRENCY RISK
Interest rate risk is the risk that as
interest rates increase, fixed income
investments will lose value
INTERESTRATE RISK
Strategies to Manage Your RiskShortening maturity and investing in higher coupon fixed incomesecurities may help mitigate this risk for fixed income investors.Floating rate fixed income securities allow investors to participatein rising interest rates as coupon payments get adjustedperiodically as rates rise. For equities, any risk mitigation strategy would depend on thestate of the larger economy. A rise in interest rates if done duringa period of strong economic growth, robust job creation, andhigher corporate profits, may have a very limited impact on stocks.However, if rates are rising during a period of stagflation, theimpact on equities could be negative. Some sectors do performbetter than other sectors during periods of rising interest rates(i.e., financials, energy, healthcare) and could be considered forinvestment.
INTERESTRATE RISK
Inflation risk is the risk that a dollar
today will be worth less tomorrow, due
to rising prices for everyday goods and
services
INFLATION RISK
Strategies to Manage Your RiskInvest in a diversified portfolio of stocks, equities and bonds totake advantage of a wide range of potentially higher returnsthat may allow your financial assets to grow faster than inflation– preserving your purchasing power today into the future. Focus on investing for real (inflation-adjusted) returns and notjust nominal returns. Today, an investment in money marketfunds due their below normal rates of return will not provideinvestors with the inflation protection they need.Invest with a long-term time horizon. Over the long-term,volatility of investment returns in a well-diversified portfoliotends to fall.
INFLATION RISK
Your approach to risk will change over your lifetime.
At The Darrow Company, our integrated investment approach
places a strong emphasis on risk management, as the amount
of risk you assume may be the one aspect of investing that is
within your control.
Let us help you navigate your financial future.
Book your freeconsultation today
The Darrow CompanyBoston - Concord - Los Angeles
978-369-5144
The material contained in this presentation is for general information only and should notbe construed as the rendering of personalized investment, legal, accounting, or tax advice.