Risking It All For The Cheese?

The S&P 500 Index (“the market”) hit an all-time high of 1987.98 on July 24th. If you listen to the pundits and the media you would think that the moves over the past weeks and months had been substantial. Actually, since early summer (the first week of June), the market has been bouncing between approximately the 1850 and 1885 level (a 1.6% move in either direction). Given such a narrow trading range, the VIX (the Volatility Index) has been near historic lows.As a money manager, I strive to constantly assess the potential risk versus reward of every investment made; that is, what is the probability that I am going to get squashed by mousetrap (risk), versus the likelihood of snagging the cheese (the reward)? This typically takes a lot of patience and requires turning down the media noise.


Like everyone, I want to participate in bull markets; after all, investing in the markets is one of the few tools investors have available to mitigate the deleterious effects of inflation. However, my experience has taught me that seeking to apply a disciplined risk management methodology is likely equally important, and possibly more so, than trying to squeeze every last ounce of a bull market.

Managing Risk is Alexis Advisor’s Core Tenet #2.  What is meant by “risk management,” why is it important, and what tools can be applied to managing portfolio risk?

What is Risk Management?

Investment risk is defined as the probability or likelihood of occurrence of losses relative to the expected return on any particular investment.

Money management is all about assessing the strengths, weaknesses, opportunities and threats among various investment choices – and the inevitable tradeoffs when attempting to maximize returns assuming a given appetite for risk.

That all sounds very “text book,” so what does managing risk mean to you?

Why Manage Risk?

Managing risk in one’s portfolio is important because we only have a limited time horizon to earn, save and build enough wealth to retire.  A few key points to consider:

  • Perverse Math If you lose 50% of your assets, it takes a 100% return just to get back to where you started – not a 50% return. The last two bear markets (the dot.com bubble and the financial crisis) resulted in a peak-to-trough loss of 49.1% (3/24/00 – 10/9/02) and 56.8% (10/9/07 – 3/9/09), respectively.  The less you lose, the less you have to recoup, and over time, the more you will likely build wealth.


  • Tic – Toc   If you had been applying a “buy and hold” strategy starting in the spring of 2000 (buying and holding the S&P 500 Index), it would have taken you approximately 13 years to get back to and exceed where you started. If you had been hoping to retire during this period, you may have found it challenging.

Very few individual investors have 100% of their assets invested in the stock market for this reason -   while there is the potential for a lot of upside, there is also the possibility of a lot of down-side. And the timing of these ups and downs has a lot to do with one’s ability to retire.

What Tools Are Available?

Obviously, you can’t control when these ups and downs are going to occur.  However, there are tools that can be used to help manage the volatility and risk of loss in your portfolio. Following are three, in order most frequently used by the individual investor:

  • Bonds & Bond Funds  Adding bonds/bond funds to your portfolio mix has been the traditional approach of many individual investors. In our lifetime, the conventional approach was to increase your bond allocation as you moved closer to retirement. This has worked fairly well given that we have been in what’s called a “secular bond bull market.”Interest rates and bond prices inversely correlated – meaning they move in the opposite direction of one another. So, when interest rates go down, bond prices go up, and vice versa. Since 1982, interest rates have gradually been trending down, reaching near historic lows over these past couple of years. Given this favorable environment, adding bonds to a portfolio has likely served investors well as an offset to the risk associated of equity investments.

However, today we find ourselves in a situation where rates are likely to increase over the coming years.  Rising rates mean that bond fund prices will decline. You can still buy individual bonds and recoup your initial investment if you hold the bond until it matures, however, traditional bond funds don’t offer this feature, and as such, may subject investors to loss of principal.

If bonds aren’t likely a preferred risk management tool given today’s interest rate environment, what are some other options?

  • Active Investment Management  Another approach for managing stock market risk is to take an active investment approach – that is, not just “buying and holding” a portfolio of stocks or stock funds, but seeking to buy when price trends are going up, and sell when the price trends are declining.

Individual investors are less inclined to use an active approach due to the time commitment and access to the necessary research.  This type of approach requires ongoing monitoring and patience.  In other words, it’s not a “set it and forget it” approach. And while an active approach seeks to manage bear market losses, it may lag during bull markets – hence the need for patience.

  • Options   A third approach to managing stock market risk is to buy what are called “protective puts” on your stock portfolio. Options are an excellent tool and used by many institutional money managers. However, they require quite a bit of study. If you have the time, inclination and resources to learn about these tools, then I recommend doing so.

So, what is an individual investor to do in today’s environment, especially if you have cash on the sidelines?  How should you use these risk management concepts to help in your decision process?

I would suggest listening to the first two minutes of the following podcast with, David Kotok, the Chairman and Chief Investment Officer at Cumberland Advisors, who was a guest on this morning’s Bloomberg Surveillance radio program:


While there are never any guarantees in this business, in short, Kotok says that he is “one third in cash or a little more” because he sees ‘”risks rising.”  No one has a crystal ball – that is, the market could creep higher – especially given that the S&P 500 is within striking distance of 2000. But, again, it’s worth considering “risk versus return” whenever your money is at stake.

If you would like to learn more about our investment approach or our portfolios, we encourage you to contact us and join the conversation.

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Core Tenets

Information contained herein is for informational purposes only and is subject to various interpretations and time-frames, and should not be considered investment advice. Advice may only be provided after entering into an advisory agreement with Alexis Advisors, LLC (“Advisor.”) Advisor does not assume any legal liability or responsibility for any incorrect, misleading or altered information contained herein. Advisor shall not be liable for the improper or incomplete transmission of the information contained in this communication. Past performance is not indicative of future results while changes in any assumptions may have a material effect on projected results. Third Party Research Disclaimer: Third party research is provided for information purposes only and has not been prepared by Alexis Advisors, LLC. The information contained herein is based upon sources which we believe to be reliable, but no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in the reports. About : Alexis Advisors, LLC is a Registered Investment Advisor with the Commonwealth of Virginia. Advisor’s current Disclosure Brochure is set forth on Form ADV Part 2 and is available for your review upon request. Please contact Advisor promptly if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account.