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Manage risk through diversity

Posted By Robert On Saturday, January 25th, 2014 With 0 Comments

The markets have a habit of sometimes turning and turning hard for no apparent reason at all. Sure the media will dig until they find a believable reason why it happened but sometimes the market just gets spooked and all or many of your positions will get ‘smashed’. While it hasn’t happened so much in the last 5 years it does happen more than we would want so look to maintain reasonable portfolio leverage and perhaps be in more markets than one. Whilst the big markets are sometimes all in sync, the run-on effects usually vary and some are counter-cyclical. Once you build a sizeable portfolio, risk management becomes even more paramount so find ways to reduce it. Diversify into different markets (e.g. US and Australian.), different products (Commodities, shares, indices) and perhaps even consider using a few different providers.

We have seen before that banks like Barings or trading houses like Refco have collapsed so consider diversifying your money amongst a few providers so if one fails, you do not suffer a fatal blow to your account. Sure it may be more difficult at first, but what price do you put on safety?

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