Finance “What if there’s a market downturn/ correction/crash?” This is the possibility of losing money because of issues affecting the entirety of the market, as opposed to an issue affecting a specific company or industry within it. An extreme example was the financial crisis of 2007-08: what started as a problemwith banks writing bad mortgages quickly escalated into a market-wide problem that brought down stocks and other assets which had nothing to do with either banking or real estate. Understanding your personal risk tolerance before a downturn actually happens is key to managing this “what if.” Ask yourself: what if your portfolio suffered a broad, 10-20% decline in value over the course of a year or so? How would you feel? How would your lifestyle be affected? Would you have to cut back or adjust expenses to accommodate less income from your portfolio? Would you be tempted to cash out for fear of your holdings declining further? If yes, now is probably a good time to trim back your equity holdings, or at least some of your more growth-oriented or speculative positions. You can also protect yourself by purchasing ‘put’ options on select securities, or on a broad market index. Keep in mind that such strategies aren’t for newbies, however. They require expert market knowledge and some serious discipline. If you’re interested, do your homework and seek professional advice. “What if XYZ stock drops overnight?” Clients leave, sales dry up, products become obsolete, competition becomes fierce – business is an inherently risky endeavour. Same goes for investing in businesses, which is what you do whenever you invest in stocks. What you’re doing when you buy a given stock is placing your confidence in the skills of management to foresee and avoid these kinds of business risks. If they do, the value of your stock should rise over time. If they don’t, the value should fall. The best way to manage this “what if ” is to diversify. Is your portfolio overweight in any one company – more than, say, 10% of your portfolio in any one name? Would a 20% decline in your top holding put a significant dent in the overall value of your portfolio, or make you feel as if you had to change your lifestyle or your spending habits? Yes? Then now may be a good time to protect yourself by trimming back those positions and re-allocating among several different companies, in different industries and different geographic markets. “What ifs” inherent in investing The following are risks “built in” to the investment process. If you put money into stocks, bonds or other assets, you’re going to have to accept and address certain risks that come along with those assets. CSANews | FALL 2018 | 33
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