Last week we discussed some key concepts in personal portfolio management.
The three most important metrics to track for your personal portfolio are:
- What was the peak value of your liquid portfolio?
- What percentage have you dropped from your peak?
- What is your equity exposure (total equity value divided by total portfolio value, including cash and bonds that are held to maturity)?
If you are dropping too far from your peak past a certain threshold for normal market volatility, say -5%, perhaps it's time to incrementally reduce your equity exposure to reduce your risk and protect your assets from an extended bear market. You can reduce your equity exposure by selling your funds with a "Reduce" or "Liquidate" Kinetic Financial recommendation. The rate at which you reduce your equity exposure relates to your personal risk tolerance.
Similarly, if your total liquid portfolio is increasing from its bottom (past a certain threshold- say +5%), perhaps it is time to increase your equity exposure by buying funds in the best areas of the market from a Risk and Reward perspective. You can increase your equity exposure by buying funds with an "Accumulate" or "New Buy" Kinetic Financial recommendation.
This strategy will help you make money in the best areas of the market during *sustained* market upturns and protect your assets during an *extended* bear market.
As we discussed previously, the Kinetic Financial Model Portfolios are tuned to assume "market" risk as defined by the S&P 500. If you are willing to accept this level of risk for your portfolio, you can follow the model portfolios exactly.
Regardless, we believe it is very useful for everyone to track their portfolio using the three simple metrics described above.Labels: portfolio management
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posted by Ramesh Agarwal & Team @
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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