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As you already know, the market has been in a steep decline since last October. During this time we have managed risk by reducing our exposure to underperforming funds, especially in Small Cap and International markets. Weighing the risk of a further market drop against the risk of missing out on a big rally, we have increased our exposure to better performing funds, especially in Consumer Staples, Utilities, and Large Caps.
It is important to realize that the Kinetic Financial Model Portfolios must be predominately invested in the market at all times in order to compete with the broad indexes during short time frames. In other words, the Equity Exposure of the Model Portfolio (total equity value divided by total portfolio value, including cash and bonds that are held to maturity) must always be close to 100% in order to complete with the indexes during 3-month, 6-month, and 12-month time frames, especially during market rallies.
Since the Kinetic Model Portfolios are almost always invested in the market, it will have market risk characteristics which may be undesirable to the investor from a risk tolerance perspective. For example, the S&P and the Kinetic Financial Model Portfolios lost about -18% from their peak in Oct 2007. Taking on this much risk may not be suitable for an investor depending on their risk tolerance.
For this reason, for our personal portfolios, we very carefully track our Equity Exposure to ensure it is inline with our personal risk tolerance profile. We also carefully track the peak value of our portfolio and the % we have dropped from our peak value. If we drop too far from our peak portfolio value beyond our comfort level, we can reduce risk and Equity Exposure by sell selling our weakest positions. On the flip side, if we start making money from our portfolio, perhaps we may be willing to increase our Equity Exposure (and risk) by buying funds in the fast growing areas of the market from a Risk and Reward perspective.
In this way, the Kinetic Financial Model Portfolios help us to manage the equity portion of our portfolio, but this is only one dimension of success portfolio management.
The main point: you may not want to be 100% invested in market the way the Kinetic Financial Model Portfolios are based on your personal risk tolerance.
We will discuss more concepts in portfolio management, equity exposure, and risk management next week.Labels: Risk Management
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posted by Ramesh Agarwal & Team @
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