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Risk Management and Active Asset Allocation: Navigating Market Cycles

Risk Management and Active Asset Allocation: Navigating Market Cycles
June 25, 2024

As we navigate the ever-changing economic landscape, it’s crucial to understand the importance of risk management and active asset allocation. At Best of US Investors, we believe these strategies are key to protecting and growing your portfolio over the long term.

Understanding the Macro Picture

To effectively manage risk, we must first understand where we are in the economic cycle. We look at three key factors:

  1. Economic growth
  2. Inflation
  3. Monetary policy

These factors help us identify which of four economic sectors we’re currently in:

  1. Accelerating growth, neutral inflation, neutral monetary policy
  2. Accelerating growth, rising inflation, hawkish monetary policy
  3. Slowing growth, rising inflation, concerned monetary policy
  4. Slowing growth, slowing inflation, dovish monetary policy

In 2024, we’ve seen a rapid shift through these sectors due to the Federal Reserve policy changes. United States moved from sector 2 to sector 4 in early 2020, then to sector 3 as stimulus measures took effect. As stimulus has wound down, we’re moving back into sector 4 – a recessionary environment.

 

Risk Management in Practice

Given these shifts, how should investors respond? Here are key strategies to consider:

 

  1. Regularly reassess your risk tolerance: ensure your portfolio aligns with your current risk appetite.
  2. Rebalance and reallocate: As market conditions change, adjust portfolio allocations to manage risk.
  3. Maintain proper diversification: Limit individual equity positions to a maximum of 6% of the portfolio to prevent overexposure.
  4. Trim winners: When positions grow beyond their target allocation due to strong performance, consider trimming them back to their original weight or placing trailing stop-loss orders.
  5. Adapt to sector rotations: consider adjusting holdings based on which economic sector we’re in, reducing exposure to underperforming sectors and increasing allocation to defensive positions when appropriate.
  6. Stay invested for the long term: While actively managing risk, maintain a long-term perspective, focusing on intermediate (90 days plus)  to long-term trends (252 days plus) rather than short-term (21 days or less)  fluctuations.

Remember: You’re Not Just an Investor, You’re a Risk Manager

The key takeaway is this: successful investing isn’t just about picking winning stocks or timing the market. It’s about managing risk effectively across all market conditions. By understanding the macro environment, maintaining proper diversification, and actively adjusting your portfolio, you can navigate market cycles more effectively and work towards your long-term financial goals.

At Best of US Investors, we’re committed to helping our subscribers to become better investors.  Learning the techniques of world class money managers by spotting MACRO Economic trends, sector trends and building a process to capitalize on the opportunities. 

Give us a try! Click the following link to get a 14 day Free Trial of the Platinum Channel.

https://bestofusinvestors.com/shop/platinum-swing-trading/

 

P.S. Must give credit to the guys and gals at Hedgeye.com for teaching proper risk management.

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