One of the most important parts of taking a vacation cruise is the “lifeboat drills.” At the beginning of the journey, each passenger must go through a series of demonstrations that help prepare them for emergency situations. In other words, having a plan in case something difficult happens.   In the investment world, these “lifeboat drills” do the same thing. They help investors see we have a plan for managing volatile situations. They can also help identify potential areas of risk inside investment portfolios.

We cannot avoid risk, but we can take steps to help identify, quantify, and manage it. When the markets are performing very well and smoothly, it can be easily ignored as something unimportant. However, that is not reality. Difficult situations do arise, and it is important to have a plan before you need it.

At Anchor Wealth Management, here are a few elements that we believe help manage risk:

1. Supply and Demand indicators are used to help determine whether we are on offense or defense.

I believe the financial markets operate within the laws of supply and demand. When demand outstrips supply, prices go up in value and we begin to see markets trend upwards. When supply outstrips demand, prices go down and we begin to see markets trend downwards. Supply and demand can also be seen in everyday life, whether we are trying to buy a house, a car, or some item online.

By watching indicators that help identify when demand is getting stronger, it helps put odds in our favor that markets could trend higher, i.e., “offense.” This could be a good time to consider putting money to work inside portfolios.

Conversely, when supply is getting stronger, these indicators help quantify the probability that markets might go lower, i.e., “defense.” In this environment, it may not be a good time to buy new investments, but it is a good time to refine our list of potential investment candidates.

2. There is a maximum allowance for each segment of the market that we participate. This helps with diversification.

One of the most important mantras with investing is diversification. “Don’t put all your eggs in one basket.” At Anchor Wealth Management, we have quantified how much could be invested in any one area of the market. This is extremely important, because we believe no one should have 100% of their portfolio in a single investment idea.

3. Every position added to the portfolios has a downside exit strategy in place before it is added.

No one has a monopoly on information or knows the future. Therefore, it is impossible for every investment idea to work, even though it has been heavily researched and analyzed. So, before we commit to an investment idea, a strategy is mapped out on when we will sell a position if it goes too far in the wrong direction.

We have all been there in different capacities. We quit a job if it doesn’t meet our needs or we sell a car that doesn’t seem to operate the way we want anymore. With investing, it works the same way. Even though an idea looks like a good opportunity, it may not work out. Therefore, we determine when it is time to remove the position from the portfolio. We believe this can be helpful in managing downside volatility.

4. Risk is continuously monitored by moving exits up, as positions rise in value. This aims to manage risk in each position and seeks to help protect profits.

There is a saying, “It is not what you make, but what you keep.” This holds very true in the investment world. In my 28 years of experience, I have heard countless stories from people telling me how much a particular investment grew, before seeing it slowly (or quickly) lose most of its value. True, it can eventually come back, but sometimes it can take years. So, we try to prevent big profits from being lost, by raising our exit strategy as a position moves above certain price levels.

No one likes to go through difficult times in the markets. But it is inevitable. So, rather than hope for the best, we like to have a plan in place that helps guide our decisions during these times. These four tactics have been very helpful and effective during difficult markets in the past. They don’t guarantee success, but they do help us navigate rough waters. Just like being on a cruise, no one wants to go through a turbulent storm, but it does help knowing you’ve done your lifeboat drills.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

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