Wednesday, December 14, 2011

Minimizing Our Portfolio Volatility

EU saved or EU will fail.   The market is being whipsawed everyday by the current perception.  The market direction is hard to project because a single event can change the market trend significantly.   My short term goal is to minimize volatility as much as possible.  Here is how I am doing that:

  • Cash.  There is zero short term volatility for cash.  Of course, it won't grow.  However, it doesn't get smaller either.    In addition, I will have funds to purchase stocks when the market falls.
  • Defensive stocks.  If I buy stocks, I will stick to good dividend paying stocks from strong companies.  These types of stocks don't fall as much in a down market.
  • Short poor performing companies.   I don't want to be mainly short since a positive perception can cause the market to advance significantly.  However, by being short some stocks, our portfolio decline will be minimized when the market falls.
Currently, we are still mostly in cash.  However,  I have started to buy some defensive stocks and have shorted one stock.   For example when the market was down today, our portfolio was down, but the losses were mitigated by two defensive stock that were up and gain from the stock which was shorted.  When the market rises, our gains will likely be lower than the overall market, which I'm willing to accept as the price of lower volatility.

For more on  The Practice of Personal Finance, check back every  Wednesday  for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

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