Risk Analysis of Portfolio – 2009 3Q

growthLast week, I presented an update on the monthly progress of my dividend portfolio. In this post, I am discussing the quarterly risk analysis. My objective here to make sure I am continuing to following my risk management process.


  1. Maintain pre-determined asset class allocation;
  2. Maintain pre-determined diversification (any sector should not exceed 10%); and
  3. Dividends from a single stock should not exceed 5% of total dividends.

My dividend portfolio holdings can be referenced in My Portfolio menu at top of this page.


Maintaining Asset Allocation

Chart 1 shows the asset class allocation along with my maximum target limits. In general, I am continuing to meet (or much closer) to my pre-defined target levels. During 3Q09, I did not make any contribution to the emerging markets index funds such as VWO and EPI. This was because I believe they rose too quickly to my comfort level. I am still tad lower than my maximum limit for emerging markets.

continue reading rest of the article….

Style Drift in Closed End Funds

riskIn my view, Closed End Funds (CEF) are very similar to mutual funds with 1%+ of expenses, and many are actively managed. The difference lies in trading and not able to create new units. When I started investing few years back, in income domain, I was attracted by high yields. While I got rid of quite a few CEFs, I still continue to hold IIA, IGD, and AOD.

Among others, one of the issue with these funds (for which I get annoyed) is the way the fund managers drift away from objectives and execution strategy. Investors continue to remain invested under the impression that fund managers are continuing to stick to the originally stated objectives. Furthermore, there is nobody to question these managers. The whole premise of using actively managed funds (including CEFs) is that managers will keep up original objectives and use their skills for reducing downside risk. Let me discuss two examples:

continue reading rest of the article….

Hedging Against Various Economic Issues

As an investor this is my first downturn. What a recession it is turning out to be? In relative terms, I do not know how bad this recession is. Whoever I talk to, it seems everybody feels that this is the worst one and would perhaps be the most difficult one. Another aspect that I have observed is the folks in 20s and early 30s seem to be using this as an example to not believe in stock market, or scouting for safety, or losing their entrepreneurial spirit. Once again media seems to uphold its traditional values of sensationalism and harping on few themes. CNBC will make you feel that everything is fall apart the next day.

Some the media themes now-a-days are China’s domination, India’s rising potential, Dollar’s demise, US losing its steam, various type of flations, and few more gloom and dooms. Somehow the focus seems to be eased away (not gone completely) for banking system. continue reading rest of the article….

Risk Analysis of Portfolio – 2009 1Q

Last week, I presented an update on the quarterly performance of my overall portfolio (this includes my index funds, opportunity portfolio, and dividend portfolio). Here I am discussing the quarterly risk analysis. My objective here to make sure I am continuing to following my risk management process.

  1. Maintain pre-determined asset class allocation;
  2. Maintain pre-determined diversification (any sector should not exceed 10%); and
  3. Dividends from a single stock should not exceed 5% of total dividends.

My dividend portfolio holdings can be referenced in “My Holding” menu at top of this page. continue reading rest of the article….

Asset Allocation and Diversification

Any prudent portfolio management process must include the principles of asset allocation and diversification. These are two tools available to us for our portfolio risk management. This has been said many times, presented many times, and we individual investors make mistakes. On a personal front I have been guilty of it. Asset allocation and diversification are two different aspects which have different objectives.

In true sense, asset allocation is different types of assets which are either non-correlated or at least have low correlation. The notion here is that if these assets have low correlation, the volatility in returns will smooth out. Table 1 shows the average correlation factors in 18×18 matrix for different asset class such as real estate, international stocks, emerging markets, high-yield bonds, U.S. bonds, long-short, and investing styles. Table 2 provides the standard deviation of these correlations.

Between these two tables, we can observe that there is low correlation between stocks, bonds, real estate, and natural resources. In addition, the emerging markets and international markets have relatively higher correlation of up to 0.6. Investment strategy that includes asset allocation in true sense will have these lowly correlated assets included in the portfolio. It is hugely unlikely that at a beginning, we may not have all assets. However, based on individuals risk profile, it surely can be build over time. Asset allocation is designed to smooth out volatility and average out growth of the portfolio. continue reading rest of the article….

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