24 September 2012

Equity Investment = Doing Business

Just recently, one of my friends asked me to join a home based business. She mentioned that it is a very relaxing job and you can spend more time with family after first few years efforts. I replied to her that I am actually a full time investor / trader, so I would focus on my business first instead of joining her. Her impression on investment is actually quite negative, telling me that she also had some trading experience in FOREX, but it was a high risk game. I begged to differ and told her that I could manage well if I manage the risk as well, which I  think most of the investors neglected on.

As my portfolio income (e.g. Capital Income + Dividend Income) grows bigger and my active income as a remisier is in relative smaller amount, I have to spend some time to manage my portfolio to ensure that I can still survive during the bear market (this was due to 2 main factors, firstly my remisier income would be reduced during bear market, as lesser clients would trade during this period, secondly, my portfolio also will be reduced size due to my long-only equity portfolio).

Some of the risk management I could think of is:

1. Setting up CFD account to allow me to short / hedge against my portfolio during downtrend. As I am not good in timing the market, so this is only a backup plan for me.

2. Reduce the equity portion in long-only equity portfolio and convert it to cash/risk free asset. This is based on the theory that you can adjust the risk by increase or reduce the percentage of equity in your portfolio.

3. Invest in low beta stock or low correlation stock. Low beta stock performs best during bear market and performs worst during bull market. Alternatively you could combine stocks with lower correlation in your equity portfolio. The main idea behind it is reduce the volatility of portfolio value.

All the above require you to be "actively" involved in managing your portfolio. If you are a passive investor, I would suggest you to perform regular portfolio rebalancing at least once year, so you can still maintain the percentage of the equity vs risk free asset vs other asset classes in asset allocation which you preset earlier.

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