Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Directions
Newsletter Sign-up
Site Search
Site Map
Home
Tell A Friend About This Website
 
 
 
Informational Booklets   

 

Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

Risk Management

Money can’t be made without taking risk.  Risk management is not a process to eliminate risk.  Instead, the goal of managing or controlling risk is to ensure that enough reward is generated relative to the risk taken.  It is important to focus on identifying potential sources of risk, understanding those sources and then making proactive decisions as to which risks to take as well as which risks to minimize.  Risk is a problem when it is unintentionally taken on, misunderstood and/or under or uncompensated for the risk accepted.

 

The unforeseen does occur and once-in-a-lifetime events that occur every few years have become the norm.  Some examples include:

 

  • From 1992 through 2001 – A ten standard deviation event occurs every year in at least one financial market
  • 1994 – The Fed raises interest rates seven times for a total of 3.50%
  • 1995 – The Mexican Currency Crisis occurs
  • 1997/1998 – The Asian Contagion – (Emerging Stock Markets fall -57.18%.  This was started by Thailanddevaluing the Baht and causing an economic meltdown of East Asian emerging market countries which eventually spread to the United Statesand forced the Fed to lower interest rates.)
  • 1998 – Long-Term Capital – the hedge fund, almost melts down the world’s financial markets
  • 2000 to 2002 – The S&P 500 falls 44.70% from peak to trough.  The NASDAQ composite falls 75.03%
  • 2001 – September 11th
  • 2002 – Widespread corporate scandals
  • 2003 – The mutual fund scandals and the Iraq War

 

What can be done to minimize these risks to avoid portfolio losses?

 

  1. Stress testing portfolios by considering the unthinkable.

 

  1. Build a portfolio with investments that have low correlation with one another.  Although correlations go out the window in times of crisis in the short run, they do work well, usually in a period as little as a few months.

 

  1. Avoid the same mutual fund “familyitis.”  No fund family alone offers good or great diversification options (funds) within the fund family that have low correlation with each other.

 

  1. Hire portfolio managers that have maximum flexibility in what they invest in and who don’t override their own security selection discipline.

 

  1. Forget the four corners approach – in other words, style box investing – if all of the monies in a portfolio are going to be in U.S.securities only.  Virtually all domestic equities have high correlations with one another.

 

  1. Always continue to perform due diligence on an ongoing basis.  In short, keep asking questions.  Talk with portfolio managers of each fund that is being utilized or researched, read articles and research materials about a fund as well as the fund’s prospectus and the Statement of Additional Information.

 

  1. Avoid portfolio managers with too much money relative to the asset class they are in.  They can’t sell quickly enough to adjust their portfolios.  Listed below are a few (although somewhat arguable) criteria for maximum asset sizes of equity asset classes:

 

U.S. Micro-Cap Funds                            $200 million

U.S. Small-Cap Funds                            $500 million

U.S. Mid-Cap Funds                               $1.5 billion

U.S. Large-Cap Funds                            $5.0 billion

Hedge Type Funds                                 $500 million

REIT Funds                                           $500 million

Emerging Market Funds                         $500 million

International Small-Cap Funds                 $500 million

International Large-Cap Funds                 $5.0 billion

 

  1. Make sure the fees a portfolio manager is paid are justified by the risk-adjusted returns received as well as the services provided.

 

  1. Always invest with risk management in mind – not only from a negative return standpoint, but relative to inflation, after-tax returns, liquidity and how the advisor counseling the client will be perceived from a client’s standpoint.  Avoid fund groups with a checkered history from a regulatory standpoint or that offer an unsustainable recent track record.  A blow-up or substantial loss is just around the corner.  A long, uncomfortable explanation to clients will undoubtedly accompany it.

 

  1. Evaluate investment and economic assumptions continuously.

 

  1. Follow the legends of investing – people like Warren Buffett, Jeremy Grantham, Steven Leuthold, Robert Arnott, Bill Gross, Cliff Asness, Jean Marie Eveillard, Robert Rodriguez, etc.  These individuals may miss the short term move, but they almost always have the big picture correct.

 

  1. Hire portfolio managers that have substantial portions of their own net worth invested in the fund they manage.

 

Make sure the unforeseen is foreseen.



INDEX
  • Now Is A Perfect Time To Open A New Business
  • Do You Know If Your Business Really Is Small?
  • 4 Estate Issues For Business Owners
  • Self-Employed? Map Out Tax Details
  • 10 Easy Steps To Take If Opening A New Business
  • To Buy Or Not To Buy: That Is The Business Franchise Question
  • Ever Considered Helping Your Adult Child Open A Business?
  • Do You Know What Kind Of Business Not To Open?
  • Do You Plan To Move Your Business To A New State?
  • Dispel These 7 Popular Myths About Retirement
  • 4 Retirement Plan Options For Your Small Business
  • Are Stocks Overpriced And Forming A Bubble?
  • 4 Steps To Creating A Dynamic Business Budget
  • Can An Underfunded Small Business Startup Be Successful?
  • What Happens If You Have Excess Capital Losses?
  • This Is Not Granddad's 'Defined Benefit Plan'
  • Despite Much Pessimism, Slow Growth Persists
  • How To Take Your Section 179 Deduction To The Max
  • Squeeze More Out Of Bonus Depreciation Deductions
  • A Common Error In Powers Of Attorney
  • For The Self-Employed: 4 Retirement Plan Choices
  • Which States Are The Most Friendly To Businesses?
  • How Economic Myths Distort Investment Outlook
  • Don't Forget About Roth 401(k)
  • REITs: A Great Diversification Investment
  • Shopping For A Bank Account That Pays The Highest Possible Rate Of Interest
  • The Twenty Top Tax Breaks In The New 2010 Tax Act
  • Investing Defensivley Does Not Mean Deserting Stocks
  • 401(k) Alternatives For Business Owners
  • Tax Court Okays Deducting Cost Of MBA
  • Employers Find Ways To Mitigate Liability On 401(k)s
  • Working Longer: What's A Post-Retirement Job Worth?
  • Slash Taxes By Swapping Like-Kind Assets
  • Transferring The Family Business To Your Heirs
  • Business Owners Get Big Tax Cuts In Recovery Act
  • Move Fast To Corral Emergency SBA Loans
  • Risk Management
  • Estate Taxes And The Obama Administration
  • Gifting A Business Can Cut Estate Taxes
  • A Little Bond Logic Yields Insights
  • Avoiding The IRA Rollover Crackdown
  • Ruling Cites Business Owner Responsibility to 401 (k) Plans
  • Ruling Cites Business Owner Responsibility to 401(k) Plans
  • How Much Is Your Business Worth?
  • Managing Cash Flow In Tight Times
  • When Times Are So Scary, Opportunities Emerge
  • Avoid Being Accused Of Insider Trading
  • Lifecycle Funds May Pose A Hidden Danger
  • Funding A Friend's Business Venture
  • Beware Of Social Security Identity Theft
  • Regulatory Guidelines Update
  • Small Business And Work Opportunity Tax Act
  • The Oil Patch Profit Squeeze
  • Free Credit Reports Available Online
  • Understanding the Importance of a Fiduciary Standard
  • Energy Systems Scale and Timeline
  • Timber As A Liquid Investment
  • Timber Facts
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Bank Loan Funds - A Primer
  • Ethanol: Salvation or Panacea?
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • A Primer On Managed Futures
  • Identity Theft: What Documents Should You Shred Or Store?
  • The Case For Industrial Metals
  • Total Credit Market Debt (All Sectors) As % Of U.S. GDP
  • Know The Score
  • REITS: A Very Good Portfolio Diversifier, But Should You Invest In Them?
  • Does Investing Internationally Still Diversify Your Portfolio
  • Another Way To View The Current Valuation Of REIT Sector
  • Understanding Risk-Preparing For The Unseen
  • Bank Loan Funds: A Great Fixed Income Investment As Interest Rates Rise
  • What Is Shorting Expense?
  • How Dangerous Is A Dollar Crash?
  • How Volatile Can The Stock Market Be?
  • GMO 7-Year Asset Class Return Forecast Is Bleak
  • Too Many ''Phish'' In The Sea
  • Identity Theft In The New Year
  • Ways To Improve The Score
  • To Reinvest Or Not To Reinvest
  • Why Not Alternative Fixed Income Investments?
  • Just How Expensive Is The Market?
  • Beware of Brokerage Firms' Misconduct
  • Identity Theft : Correct Those Credit Reporting Errors
  • Risk-Controlled Investing
  • Q & A With Robert Arnott
  • Identity Theft : Applying For Credit? Better Check Your Credit Report First
  • Identity Theft: Everyday Prevention
  • Identity Theft : Help Is On Its Way
  • Identity Theft: Tips To Protect Yourself
  • Identity Theft : Don't Fall For That E-Mail!
  • Identity Theft : One More Reason To Protect Your Credit
  • Identity Theft: A Note About Social Security Numbers
  • What Do Rising Interest Rates Mean For Money Market Yields?
  • Exit Gracefully: How Business Owners Should Plan For A Comfortable Retirement
  • Section 529 Plans Are Popular But Not The Only Way To Go
  • The Importance Of Commodities In A Portfolio
  • A Tale Of Two Hedges
  • IRS Refuses Change Of Section 179 Election To Expense Depreciable Property
  • Small Businesses Need To Be Aggressive On Costs
  • Your Medical File Report May Need A Check-Up
  • Do It Yourself Tax Preparers Watch Out: Tax Answers From IRS Centers Oftentimes Are Incorrect And/Or Insufficient
  • Home Office Deductions: Hoops To Jump Through
  • Property Tax Challenges Should Not Be Overlooked
  • The IRS Will Follow Your Wealth To The Ends Of The Earth
  • Year-End Tax Defferal Planning
  • How To Find A Great Financial Advisor
  • Is It Time To Find A New Financial Advisor?
  • What Is Risk?
  • 4 Steps To A More Secure Investment Portfolio For Your Retirement
  • Traditional Investing May Decrease Your Retirement Lifestyle
  • Year-End Tax Planning Can Help Generate High Return On Investment
  • Businesses Receive Temporary Depreciation Bonus
  • Understanding Deflation
  • Is Your 401(k) Plan A Failure?
  • Succession Planning: Developing A Plan For Your Business
  • The ERISA Retirement Plan Law Spells Out Fiduciary Issues
  • Evaluating The Quality Of A Company's Earnings
  • Investing In Times Of Uncertainty And Risk: The Importance Of Diversification
  • Tax Issues To Consider When Buying A Long-Term Care Policy
  • Yesterday's Great Companies
  • Businesses Should Be Aware Of States' Use Taxes
  • Expanded Retirement Plan Contribution Limits Create New Opportunities For Business Owners
  • Succession Planning: Developing A Plan For Your Business



  • ©2017 Legend Financial Advisors, Inc.®. All rights reserved.