Honeymoon Cruise - Basics of Investing - Cruise Control Hedging

I would guess that the majority of investors have never owned an individual share of common stock or a Municipal Bond, today. Most people enter the investment arena thinking that "Risk" is a board game they played in college.

Market prices are increasingly and inappropriately influenced by decision-making based only on the derivatives that contain them. The popularity of investment products has heightened the risk for all investors and has indirectly led to many of the policy errors that threaten both capitalism and the economic fabric of America.

Where it is more difficult to connect the dots between their personal financial interests and their political alignments, product investors and derivative speculators participate in less personal markets. Few people consider the investment risk associated with public policy decisions.

But it is doable, investors have to deal with public policy risk every bit as much as they need to analyze the risks associated with the securities and other financial products they hold in their portfolios --- complicated, so in a very real sense.

And that's where all the excitement begins, the potential reward from each type is just the opposite. The risk of loss in any equity investment is generally greater than the risk of loss in any debt related instrument, apart from these important peripheral considerations.

And that the only real loss is a realized loss, not of market value, keeping in mind that investment capital is a measure of cost. Or do we risk less and try to preserve our investment capital, do we risk more for the chance of a greater return?

But it's difficult to actively minimize or manage your risk in the "open end" mutual fund or passively managed ETF marketplaces. The more boring or income focused the portfolio should be --- minimizing the overall level of risk, the older the investor, typically.

Risk management requires a selection process from a universe of securities that meet a known set of qualitative standards. Risk control requires decision-making by the owner of the investment assets. Risk minimization requires the identification of what's inside a portfolio.

While their fund mangers stand aside and mumble about the opportunities lost in either direction, product owners assume the added "fear and greed" risk of the general population.

And (b) developing outside income portfolios with any investable income above the employer matching contribution, 401(k) participants need to minimize risk by: (a) avoiding the poor diversification that may be a requirement of their plan, without a risk sensitive menu to select from.

Or buts, ands, no portfolio should have less than 30% in the income bucket --- no ifs. Not market value, the plan separates "liquid" investment assets into two buckets (Equity and Income) based on cost. The first and most important management action focused on risk minimization in any "program" is the development of an asset allocation plan.

Transaction cost minimization can be considered if you are qualified to run your program yourself, finally. And then tax minimization if possible, risk minimization comes first. And no investment plan should be developed "tax" or "cost" first.

Inflation --- a buying power problem that has nothing to do with the market value of the income producing assets, is the only real hedge against that other economic risk, by the way, income growth. Into retirement, possibly, a cost based asset allocation approach (Working Capital Model) assures growing levels of "base income" throughout the portfolio development process and.

And for profit taking, income production, three types of diversification, strict rules need to be developed for security selection. Minimizing investment risk is done best through the use of disciplined sets of rules for the various operations involved in managing a portfolio.

Causing short-term disruptions and dislocations, and when they occur unexpectedly, our plan is to take advantage of these changes as they unwind around us over time. We're not interested in massaging our market value to take the sting out of cyclical market value changes. Forget the Wall Street "I-can-fix-that" product menagerie.

And without the ageda that most people experience throughout their investment lifetimes, without commodities and hedge funds, the real risk of loss can be minimized without products and futures speculations, in the securities markets (stocks and bonds).

The QDI+PT applies equally well to both classes of investment securities, conveniently. Profit Taking are the only hedges an investment portfolio needs to assure long-term success, targeted, plus disciplined, and Income, diversification, the old fashioned principles of investing: Quality.

You'll discover that they hedge themselves quite effectively, and high quality income CEFs, if you study the long-term behavior of Investment Grade Value Stocks. "Q" is for quality.

And historically profitable companies and then only when their equity prices are well below their 52-week highs, dividend paying, b+ or better rated, risk is wrung out of portfolios by investing only in S & P.

You want to be able to buy more at lower prices. The total cost basis) and never start a position anywhere near maximum exposure, . Absolutely never allow any position in your portfolio to exceed 5% of total portfolio working capital (i.e. "D" is for diversification.

Similar diversification rules apply to industry exposure and global diversification through the use of the mainly world class companies in the investment grade quality categories.

Seek out above average yields while avoiding those that seem either too high or two low, in the income "bucket". Regular and growing dividends are a quality indicator in equities. Dividends or interest, dependable, own no security that does not pay regular. "I" is for income.

Buy established CEFs with long term "income" (not ROC) payment records. Managed closed end funds do it best and provide easy "PT" and "buy more" opportunities.

Look back, ever, and never, net/net 7% to 10% (dependent upon available reinvestment possibilities and security class), absolutely always smile and take your profits willingly. "PT" is for profit taking.

Has been shown to sustain growth of capital and income consistently in a relatively low risk environment, again and again, trading this same body of securities.

Google Part III: Ten Time Tested Risk Minimization Strategies