Written by Lance Roberts, Clarity Financial
This is probably a good time to review the 15-risk management rules we employ in our process. These rules are not new, or different, but they have been learned, and relearned, over my 30-year career.
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Why? Because I am human and every so often I let my emotions get the better of me. I hold a position too long, don’t honor a stop as I should, or try to second guess my own analysis. Inevitably, more often than not, I am retaught one of the following lessons and reminded why they are important.
While our fundamental, economic and price analysis forms the backdrop of overall risk exposure and asset allocation, the following rules are the “control boundaries” for all specific actions.
- Cut losers short and let winner’s run. (Be a scale-up buyer into strength.)
- Set goals and be actionable. (Without specific goals, trades become arbitrary and increase overall portfolio risk.)
- Emotionally driven decisions void the investment process. (Buy high/sell low)
- Follow the trend. (80% of portfolio performance is determined by the long-term, monthly, trend. While a “rising tide lifts all boats,” the opposite is also true.)
- Never let a “trading opportunity” turn into a long-term investment. (Refer to rule #1. All initial purchases are “trades,” until your investment thesis is proved correct.)
- An investment discipline does not work if it is not followed.
- “Losing money” is part of the investment process. (If you are not prepared to take losses when they occur, you should not be investing.)
- The odds of success improve greatly when the fundamental analysis is confirmed by the technical price action. (This applies to both bull and bear markets)
- Never, under any circumstances, add to a losing position. (As Paul Tudor Jones once quipped: “Only losers add to losers.”)
- Market are either “bullish” or “bearish.” During a “bull market” be only long or neutral. During a “bear market”be only neutral or short. (Bull and Bear markets are determined by their long-term trend as shown in the chart below.)
- When markets are trading at, or near, extremes do the opposite of the “herd.”
- Do more of what works and less of what doesn’t. (Traditional rebalancing takes money from winners and adds it to losers. Rebalance by reducing losers and adding to winners.)
- “Buy” and “Sell” signals are only useful if they are implemented. (Managing a portfolio without a “buy/sell” discipline is designed to fail.)
- Strive to be a .700 “at bat” player. (No strategy works 100% of the time. However, being consistent, controlling errors, and capitalizing on opportunity is what wins games.)
- Manage risk and volatility. (Controlling the variables that lead to investment mistakes is what generates returns as a byproduct.)
Everyone approaches money management differently. This is just how we do it.
