The Market is up … How’s Your Risk Management Plan?
When the stock market rises significantly (and recently it has) it is useful to remember that the law of gravity has not been repealed. Jubilation may turn to despair if a risk management plan is not firmly in place … and smart investors address risks as integral to their investment strategy.
There are many kinds of risks; some obvious (as when a company hits severe headwinds) and some subtle (as when management goes off course). Such risks are ever present.
We can categorise several of the most likely investment risks under a short list of headings:
Liquidity risk – the possibility that one may be unable to find a buyer for a security quickly enough when the need arises.
Inflation risk – the chance that the value of an asset will become eroded if inflation moves beyond what was planned for.
Exchange risk – the chance of a loss on an asset held in a foreign currency.
Interest rate risk – the possibility that a rise in interest rates will diminish the value of a fixed interest asset.
Principal risk – the chance that invested capital will reduce in value due to an exogenous event.
Speculative risk – the likelihood that ‘a sure thing’ will not deliver on its anticipated promise.
There are numerous other risks of which a prudent investor will need to be mindful, and we’ll cover these in more detail in future articles.
At Palmer’s we take risk management extremely seriously. We ‘pay through the nose’ for regular, high quality research across the range of securities we examine for clients. Additionally, our team caucuses almost daily to share what our collective eyes and ears have learned in the previous 24 hours.
We have an additional filter – it is our proven, proprietary relative value analysis process (RVA). Every researched security is scrutinised through RVA to see if it merits a place in a client portfolio. Frequently, previous ‘darlings’ are ejected because they no longer exhibit the value they did when first acquired (we avoid the ‘risk’ of falling in love with any security). Alternatively, an investment that is unloved (but otherwise sound) may gain a place in a portfolio, where, along with its siblings, it is watched with the intensity of a hawk.
In short, we approach risk in a thoroughly scientific and analytical manner. This is done whether the market is up, down or simply flat lining. It is a constant component of our commitment.
Risk, like the law of gravity, is indeed inescapable, and while Mr Baryshnikov’s observation on walking across the street is self-evident, we feel sure he would wisely have a plan to minimise it.
Maybe you would like to discuss your own risk management plan with your relevant senior advisor in our firm - and if you don’t have one, we’ll be pleased to introduce one to you.
How? Simply phone (NSW) 02 9233 2433 – (VIC) 03 9601 6800 or email jps@jpalmer.com.au
Palmer’s will discuss ways to manage your investment risk. With a no-obligation chat, you have nothing to lose.
Disclaimer & General Advice Warning
This publication has been prepared by Joseph Palmer & Sons (ABN 29 548 490 818) an Australian Financial Services Licensee (AFSL 247067). Whilst the information contained in this publication has been prepared with all reasonable care from sources, which Joseph Palmer & Sons believes are reliable, no responsibility or liability is accepted by Joseph Palmer & Sons for any errors or omissions or misstatements however caused. Any opinions, forecasts or recommendations reflects the judgment and assumptions of Joseph Palmer & Sons as at the date of publication and may change without notice. Joseph Palmer & Sons, their officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This publication is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Any securities recommendation contained in this publication is unsolicited general information only. Joseph Palmer & Sons are not aware that any recipient intends to rely on this publication and are not aware of the manner in which a recipient intends to use it. In preparing our information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors must obtain individual financial advice from their investment advisor to determine whether recommendations contained in this publication are appropriate to their personal investment objectives, financial situation or particular needs before acting on any such recommendations.
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