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Mapping out a "risk shift" strategy rather than a "sell" strategy for mutuals fund investors.

edited August 2011 in Fund Discussions
I have tried mapping out a "risk shift" strategy rather than a "sell" strategy with respect to the holdings in my portfolio. Would welcome comments.

This "de-risking" has required me to first assign a risk tolerance (that I am comfortable with) to all of my holdings. The categories of risk tolerance are as follows:

cash/cash equivalent...0% -3% downside risk due to currency devaluation and inflation (we'll ignore institutional financial strength...staying solvent)...I am presently using PONDX as my cash position and try to maintain 10-20% allocation with respect to my overall portfolio. This is where I look for cash when I look to buy "things on sale". I also have a small amount (5%) of Gold/Silver using CEF. Just an insurance policy on fat tail risk.

Low...3% - 10% downside risk...I place funds like PRPFX = Permanent Portfolio and TGBAX = Templeton Global Bond Fund as well as a whole host of Total Return / Income Funds like PTTDX, TGMNX, or USAIX. These are the anchors. They are added to when I look at my overall allocation. I try to maintain a 30-50% allocation in these funds

Moderate...10% - 20% downside risk...Many of my balanced/dividend/defensive funds fall into this category...MAPIX = Mathews Income, PRWCX=T Rowe Price Capital Appreciation, and OAKBX = Oakmark Fund. Also, PRHSX, VGHCX, GASFX, and CSRSX are some others I also include in this category. I consider these part of my core holdings that I add to when I have profits. In a downward trending market I try to de-risk my higher risk investments into these moderate risk funds. This keeps me somewhat in the market eliminating some of the market timing issues. I am never very good at spotting the exact bottom or top. So (risk shifting) into these moderate risk investments seems helpful when the market goes against me. This collection of funds could represent 20-40% of my portfolio.

High... 20% - 33% downside risk...These are primarily equity funds that I own to follow a trend, and add some alpha. I have owned CAMAX, HRVIX, MFCFX, USAGX, PRMSX, VWO, VDE, VIT, VHCOX, PRMTX, MATFX, MSMLX, WAEMX, etc. This is the set of investments that I am monitoring and trying to upgrade...improve upon. When they hit the negative 20% level or move upward a positive 10% they become candidates to "de-risk". Some in this category are doing very well such as USAGX and I may consider taking profits some are not and I may reduce my exposure to them temporarily. Cash elsewhere in my portfolio allows me the ability to add to these funds when they are trending upward. When these funds are out of favor they could stay out of favor for sometime. I look to shift some or all of these holdings into a Moderate or low risk investment. I am willing to monitor them from a de-risked position. This category of funds could make up 5-20% of my overall portfolio.

Extreme... 33%- or more downside risk... I have very small speculative position in RIMM (Research in Motion)...I have lost 55% so far this year with RIMM. I own FAIRX and have suffered a 29% loss in value with this fund. I planned on holding both of these 3-5 years but I will continue to monitor them closely and make regular "gut checks". In good times I would like to see 20% plus gains here before I de-risk some profits. These holdings could be represent 0 - 15% of my overall investments. They are small positions that I am willing to be patient with. I also find them to be my biggest learning experiences.

As I said earlier, I am not very good at timing the market at the tops or bottoms so periodic de-risking an investment that is trending above or below your tolerance threshold might be worth considering.

Comments welcome...



  • edited August 2011
    I do believe that there can definitely be a "bucket" strategy when investing, and this can be either something along the lines of a longer-term portfolio/bucket and shorter-term trading portfolio/bucket (I'm actually a believer in that; having longer-term investments in themes, etc and having a portion that's shorter-term and more opportunistic), as well as something like different risk buckets. You have to keep these buckets well-defined (although flexible), but otherwise, that's fine. I have a "real asset" bucket, "alternative" bucket, as well as more broad exposure. I've increased the "real asset" (read: "long-term theme") bucket into this decline, as well as the "alternative" bucket.
  • edited August 2011
    Its interesting how many retail investors are following a similar strategy, shifting from low-risk funds to "alpha" funds. I'm one of them.

    Flexibility lets us feel more in control, (hopefully) mitigating downside risk. Capital preservation lets you sleep well at night.
  • Hi Bee. Here is a statistical way to look at probable return range for each of the holdings you gave. Basically, the data is calculated by using 90% probability, or 1.5 x the 3 year standard deviation, then subtracting it from the the 3 year avg return to get the low and adding it to the 3 year avg return to get the high. There is nothing magic about 3 year data. It's just an easy extract to get from M*. If you used 5 year or even 10 year if available, the probability range would likely be more accurate.

    One comment though, and this is just something I took from the last big market drop, having this many funds was (in my opinion) a mistake. They were hard to deal with. But to each her own. What I ended up with was a portfolio of 10 funds I feel good about that make up 80% of my 401k portfolio. PRPFX and FPACX are my biggest holdings. I hold this fairly conservative (50% equity) core through thick and thin. What I learned from 2008-2009 was I don't know when to get out or get back in... period. I'll leave it up to good managers that have a flexible mandate. The other 20% I use as what skeeter likes to call, ballast, which would basically be my plays, things like USAGX for pm's, PRNEX for nr/energy or MAPIX for asia, ect... or that 20% can be in cash, a GIC making 4% in my case. It's just more comfortable for me having my "core" separate from a few funds I play. But... we are all different.

    Anyway, below is the probable return based on 3 years returns and standard deviations using 90% probability. I hope the copy/paste comes out okay. I'm not very good at the formatting stuff.

    Ticker 90% probable return range
    CAMAX -40, 61
    CSRSX -54, 59
    FAIRX -44, 36
    GASFX -21, 31
    HRVIX -34, 34
    MAPIX -18, 43
    MATFX -37, 46
    MFCFX -22, 44
    OAKBX -18, 20
    PONDX 4, 23
    PRHSX -29, 36
    PRMSX -53, 53
    PRMTX -31, 49
    PRPFX -8, 31
    PRWCX -25, 28
    PTTDX 3, 16
    TGBAX 0, 26
    TGMNX 5, 17
    USAGX -43, 95
    USAIX 0, 17
    VDE -41, 35
    VGHCX -23, 29
    VHCOX -40, 35
    VWO -45, 51
    WAEMX -34, 67

  • Reply to @MikeM: Thanks MikeM for your comments and the time you put in to get the data on these funds...I will definitely use this matrix...have you come across a website that gives this data...probability return range?

  • Reply to @scott: I agree with your additions and I like the bucket list theme. Thanks.

  • Reply to @bee:

    No, I haven't seen data in this form, but I've read about it's use. In fact, I read an excellent financial book while on vacation this summer that mentions it, "A Random Walk Down Wall Street" by Burton Malkiel. When I saw it in the book, it was like, "hey, I do that". Kind of reassuring. I recommend the read as have many others who post here.

    To take this data a step farther, once you have the low and high probability #'s for each fund, you can multiply each number by the percentage of that holding in your portfolio. Add all those values together and you get an idea of how your portfolio as a whole will "probably" perform. Basically you can say "I'm 90% confident yearly returns for this portfolio will fall between the high and low values in any given year".

    Example, if your portfolio consists of 4 funds:

    PRPFX has a return range of -8 to +31 x.25 = a range of -2 and +7.8
    OAKBX has a return range of -18 to +21 x.25 = a range of -4.5 and +5.3
    MAPIX has a return range of -18 to +43 x .25 = a range of -4.5 and +10.8
    TGBAX has a return range of 0 to +26 x .25 = a range of 0 and +6.5

    (notice the risk return comparison for PRPFX compared to say OAKBX. more potential gain-> reward, less potential loss-> risk)

    add the low and high values and you can say "I can be 90% confident this 4 fund portfolio will give returns of between -11% and +30.4% annual returns". If you wanted to be more accurate on the range, say 95% probability, you would use 2x the standard deviation. The range would be larger. 99% probability would be 3x the std. Using 1x std would be 68% probability. If you are able to build spreadsheets in Excel, this is very easy to set up.

    Hope that helps. Just another tool to analyze risk/return in a portfolio.

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