Exogenous Threats. These types of threats or risk factors come from an external place and affect markets – unexpectedly. Already in 2020, only 38 days into the year, the US and global markets have been presented with at least three major exogenous threats:
- Brexit becoming abruptly final
- A US Impeachment trial
- A viral epidemic, the unnamed Coronavirus in China (and now spreading to other countries too)
- (Bonus 4th threat) US-China and US-World trade policy
Why bring up the concept of exogenous threats?
- Answer: awareness or recognition of risk can be reduced when markets and returns on portfolios are continually UP, UP, UP. Note that US stock markets in are up 3.5% year-to-date despite the risk factors.
What controllable factors do investors need to be more aware of now after the sizable gains of 2019 and the past decade?
Asset Allocation. The proportion of stocks/bonds/cash in a portfolio can be monitored periodically (for example, quarterly or semi-annually, or annually) to maintain pre-determined levels of discipline in a portfolio.
Cash. Absolute amounts of cash in savings and emergency/rainy day funds needs to be monitored as well. Ask yourself if you have a “peace of mind” amount of cash on hand. Please ask me about how to determine levels of cash. Too little (or too much) cash can be a risk.
Portfolio holdings. Is there a part of your portfolio (including real estate, real estate investments or other hard assets) that is not correlated to the stock and bond markets? Cash is an asset that can protect against volatility. So are real estate, gold and other types of non-stock and -bond investments.
Diversification. Diversification is a concept that addresses ALL of the above. What steps are you taking for your portfolio to be diversified, depending on your age, level of spending and risk tolerance?
Whatever the expression: “buying straw hats in winter” or “making hay while the sun shines”, these actions are taken when times are good in order to minimize unknown risks to come.