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Risk management in personal porfolio--include all assets


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Want to hear from fellow posters about this.


How do you manage risk in your personal portfolio.

Please include all assets, like real estate, buying tips, ...


Please post any information on how you are minimizing the risk, even general principles.

What techniques are good in general.


Also post any mistakes made.


For me, it is

1. Do not have leverage with margin accounts.


As Warren says, they have no leverage and absolutely no short term debt.

Appreciate everyone's time and effort on this.

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I don't think there is a standard answer, it so much depends upon personality.  But for what it's worth, here are a few I use:


- Own house, no mortgage - house is considered outside the "investments" category, no valuation assigned, not for sale.


- No debt, other than credit card transactions, balances paid off monthly.


- Pay immediately for services, eg plumbing, resulting in getting prompt service response whenever need.


- Some investments outside of the brokerage system, eg farmland (for income), local municipality debt.


- Some LT stock holdings registered to certificate form, so cannot easily trade on mood swings - eg Fairfax, Berkshire.


- Keep cash and cash equivalent reserves outside of brokerage accounts.


- No use of margin, except on a straight transactional basis eg buy something, deliver funds within 3 days, but if

there were delay of an extra day or two in funds delivery or processing, margin account would not create problem.


- Establish "no regrets" prices for buying and selling, at which I am going to be happy no matter what happens after.

Those are of course chosen with value as primary consideration, but psychological positioning is most important part.


- Wait for opportunities.  If nothing is appealing right now, just wait a couple weeks and market will decline again.

Usually the feeling "there's nothing to buy" is a pretty good indicator that the market is too optimistic.


- With many holdings, sell enough of it on price rise to retrieve original capital, let the rest ride for dividends/value.

I realize it is irrational anchoring to prior transactional price, but it nonetheless is one of my coping techniques,

reduces enotional exposure to fluctuations.


- Structure holdings so that can take a several weeks vacation anytime, without prior notice - eg, illness,

or opportunity to do interesting project.  Don't get involved with time-sensitive investment transactions.


2008 was not a good year for my stock portfolios - down 35 pct - so don't claim that the above is good technique.

But at least above approach leaves me able to cope with psychological pressures.  Income from farmland did not

go down, and I don't get quotations, have no real idea what it's worth for resale, so don't have to worry about it.

Ditto with other investments held outside of the brokerage accounts - Fairfax shares are same business regardless

of what the quoations are doing.


One problem I have is that I want to believe the business story, like the operational aspects of a business,

and sometimes get overly enthused despite the financial structure or the personalities who are involved.

Compensating risk management is to be a quiet cynic, keep some distance.  Can take years before really

get comfortable with a business at the stock holding level.  In meantime may have bought and sold one

or two times.

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I've always viewed risk as a function of time -- both short and long term.  Have always kept a min of six months living expenses very liquid.


I don't consider the house/mortgage in the investment mix - Have not excessively levered up housing or anything else either.


If I am going to need money in the short-term (< three years) I keep it in low risk/liquid positions.


The long-term is catching up me with retirement < ten years, which for me, means reducing risk and not being 100% equities.  But that doesn't mean I've always been 100% equities. I've often held cash while waiting for 'opportunities.'


In retirement I plan to hold three years expenses in low risk/liquid positions. In any year if my portfolio goes up I'll add back one year expenses to cash. In down years, I'll let the portfolio ride and re-load when the portfolio moves up.  In retirement I plan to move to a balanced portfolio 60/40 stock/bond mix.













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Woodstove and Ericd1---

thank you and there are excellent nuggets from your writings.


Especially taking out the house from the investments category.

It was especially hard for me to do, living in a high home price area in Silicon valley, CA.

I realized the truth only 6 months back, and your writings re-inforce that for me.


I am trying to pay off the mortgage and hold the house free and clear.

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The best managed companies move at moderate pace, towards meaningful goals.  Tortoise vs hare, with T-sprints.


Distinguishing perhaps between goal (long term, hard to be precise) and objective (get done next year or two).


So for instance, Berkshire goal is widen moat in operating companies.  Cannot quantify goal except likely "better".

The specific objectives are open new furniture outlet in new city, or replace printing press, etc etc.


Thus with paying off mortgage.  Nice objective, part of goal of financial independence / security.

But don't have to race to do it.  There are stretches for opportunities, eg Couche-Tard takes on

debt to acquire Circle K, or Empire takes on debt to repurchase Sobeys shares they don't already own.

But sometimes stretch is overstretch, pulls muscle - eg Precision Drilling acquires Grey Wolf.

Even if work way out of difficulties (and I am betting they do so), have hurt prior shareholders bad,

by need to issue shares, accept high interest rate financing etc.


Fairfax last year paid off some debt, retired some shares, and paid out dividend approx 10 pct earnings (current consumption).

Still lots to do.  But don't want to repeat self-inflicted errors of 10 years ago.


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