Being an avid downhill mountain biker and skier, I learned the benefits of defining and assessing risk the hard way rather quickly, but many ignore risk when investing or get their assessment wrong when trying to understand what it truly entails.
Investment
How to manage your investment portfolio risks
Measuring the standard deviation of your portfolio is a good initial indicator of how steep the risk curve is as well as the overall level of risk being taken onboard.
This essentially creates a favourable imbalance between profit and loss, or positive and negative returns. As a result, there is a safety net in the event of a crash that minimizes the chance of your portfolio undergoing an injury that prevents it from achieving its overall objective.
Last year was an excellent chance to evaluate your portfolio because if it fully tracked a passive benchmark during a negative event, such as high inflation and the corresponding rapid rise in interest rates, there was no such safety net and, therefore, little to no risk management being offered.
This is because stock market returns by default are asymmetric given they have what are called fat tails, meaning there can be huge gains or losses at both ends of a distribution curve. Fat-tail events are rare, at more than three standard deviations from the mean, but they can wreak havoc on a portfolio when they happen. Worse, you react by trying to time the market, thereby locking in those losses.
This is why it is important to employ tail-risk hedging within your investment portfolio. As risk managers, we deploy such strategies via structured notes that have embedded downside barriers, as well as tactical asset allocation.
Looking ahead, not surprisingly, those who fully participated in last year’s correction are now advising people to double down and take on extra-long duration to try to recoup those paper losses. This is a classic example of what we call loss aversion in our business. It could possibly work out, but it nonetheless adds more risk to your portfolio.
Or, as Benjamin Graham famously said: “The essence of investment management is the management of risks, not the management of returns.”
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
Economy
S&P/TSX composite down more than 200 points, U.S. stock markets also fall
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
Economy
S&P/TSX composite up more than 150 points, U.S. stock markets also higher
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
Investment
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