Sir John Templeton
A robust plan is a good start, but it takes constant vigilance to manage the ebb and flow of markets. We enjoy the initial planning phase, but the real value is our continuous role as risk manager. When crowd excitement overtakes a steady rise, we adjust to a lower risk position. We're not here to pick tops and bottoms, but simply recognize that the investment we originally made carries different risk parameters than it did before.
Local vs. Global Risk
We continuously monitor our client accounts for both position risk and portfolio risk. Position risk is a local event, measured case-by-case, whereas portfolio risk is global. When portfolio holdings begin showing increased correlation with each other, as in late 2006, we know we've entered a higher risk period. It doesn't mean a collapse is imminent, but it does mean that investors have abandoned their guard and begun chasing risk across the board.
Exit vs. Adjust
Higher risk isn't an immediate signal to sell, just a sign that we should adjust either the size or structure of our holdings. This is often accomplished with the help of options, and allows us to reduce our downside risk while trading away some of the upside potential that may remain. Markets go from up to sideways to down, and vice versa, so incremental moves are most logical.
