Transcript:
Easan Arulanantham:
What are some strategies that you use to make sure that your portfolio is kind of defensive? In a sense when the market is kind of turning for the worse?
Tom Vaughan:
Yeah, that’s a good point, right? Because here we are, you know, coming back down looks like we might be retesting these lows that we set back on the 20th of April, I’m sorry, 20th. of May. And it starts off with just the overall allocation, right? The half to understand what that means, how much stock do you have, how much bond you have? What type of stock do you have, what type of bond you have. And, you know, we use this company Riskalyze, right? Outside company comes in and analyzes every portfolio and every holding in those portfolios. And it assigns a risk number to that portfolio, and then it shows 95% chance a projection basis for, you know, how much you might lose in the next six months? And how much you might gain based on the mixture of what’s in there. So you can look at that and say, Okay, does that work for me, especially focusing on how much you might lose in the next six months? And it even shows the dollar amounts? Yeah, which I like, because, you know, you saw some Yeah, you could lose 11%. Okay, now, I’d rather see the dollar amount, because that’s really you know, what we focus on the most. And so you get to see that you get to internalize that you get to look at it and think, okay, is that right? And so that’s the first thing. If you get that exactly right, you won’t be thinking about becoming more defensive, because you already have the right portfolio. And it’s designed for you, and your own needs to kind of get through that downturn and let you kind of sleep at night and what have you. Alright, so that’s, that’s the first thing, have the right portfolio have a way of analyzing that portfolio, this Riskalyze company sends an email to our clients every three months, showing them the risk that they’re taking in their portfolios. And I think that’s fantastic, actually, it’s a really been very, very useful.
And so then, the next level that I would be looking at, there’s just a sense of, you know, okay, now, what do I have in my portfolio individually, so if I’m going to get more defensive and still wanted to stay in the same stock allocation, for example, you start looking at things like utilities that have, you know, historically dropped less, you know, in down markets, you know, those types of things, you know, that you can take a look at. And so, what you’re looking at, in my opinion, is the standard deviation of that, of that piece of your portfolio. And so the higher the standard deviation on a 135 year basis, whatever you’re looking at, the more risk you’re taking with that piece of your portfolio. So I’m always looking at that it’s one of the huge screens that I use, and I’m looking at Exchange Traded Funds, mostly, but when I’m adding something, I’ve got some pieces that are slightly higher standard deviation from my more aggressive portfolios, and then I try to ratchet down that standard deviation on the stock side, for example, on my, you know, more conservative portfolios as far as that goes. So, you know, that’s the, that’s the thought process there is just trying to have, you know, the right mixture for what you’re trying to do. I guess the third thing would be the possibility of having stop losses in your portfolio. Can’t do that with a mutual fund. That’s why we use Exchange Traded Funds because you can put in a stop loss. And so you can have a stop loss to basically you just draw a line in the sand and say, hey, if it gets below this, I just want to get out. Could be 5% 10% 20%. I mean, there’s, there’s a whole art and science to picking the right stop losses, but putting stop losses in the portfolio allows you to just get kind of knocked out of those positions. And this can be a problem if it turns around, right it just go whoosh comes right back up, you lose. So we got to be careful there with this and and it’s something that’s really for more of an extreme situation, but you can set up a floor in your losses and just say okay, you know, even if I’m going to miss out on some of the upper and I don’t want to get below this I would say you probably have the wrong portfolio if that’s what you’re doing.
But you know, sometimes we have things that have big capital gains. Yeah, that are still risky. And so I mean, I’ve got clients who have very large positions in single stock that you know, they used to work at still working out okay. But they’ve got huge capital gains and they would maybe cut some of it back but it’s, you know, you’re guaranteed to lose a chunk of it. Yeah, because of tax right. So maybe a stop loss on that so you can hopefully stay in. But if things do fall apart, okay, I get out for that piece, right, just something to protect yourself. When we do the MonteCarlo simulation. We can also if they have a high concentrated position. We can show them what happens if they let’s say their position drops by 50% or something, we can show him what that means. And then that kind of gets through to their, you know, to their thought process of, okay, I need to protect some of that, possibly, especially if, for some people, it doesn’t mean that much, it’s kind of amazing. I’ve done some where I take it all the way down 50%, they’re still in the 90 percentile range on success. That’s okay. But if it really, really dominates, and moves their dial back a lot, then we probably need to do something to protect on that even if it means taking a capital gain, right, just because we don’t want to go all the way back down. And so anyway, that those are some of the strategies that I’d be looking at, to kind of make your portfolio defensive as far as that goes. Try to be there in the first place, be in the one that works for you. And, and I think that’s where it starts and the rest is just you know, refinements.