“I don’t have any buys for this week,” Michael says.
“But this can be a good time to “weed” your portfolio,” he adds. “There are many investment tools available to reduce portfolio risk.”
“Buying put options or selling CFDs over the index, or individual stocks, allows investors to maintain their portfolio with protection against downside risk,” says Michael.
“These approaches don’t suit every investor. Nonetheless, ‘long-only’ investors also have choices. Once again, it is stressed that the right choices depend on individual views and strategies, but investors can reduce overall risk by weeding their portfolios,” he says.
Michael says that active investors who only buy and sell shares could look at locking in gains on some of their best performing stocks.
“This is especially useful where there are significant holdings in shares that are highly leveraged to market moves – stocks that portfolio analysts describe as high-beta.”
“Companies in the Information Technology sector are prime examples. When the market is rising, they tend to rise faster but this dynamic means they may also drop faster in a falling market.”
“Reducing exposures to this sector can lower portfolio risk,” he suggests.
Michael says that care must be taken to distinguish between high-beta stocks and stocks with positive momentum.
“Stocks that rise with the market, but hold or drop only modestly when it falls, are exhibiting intrinsic strength.”
“Investors can be better off holding these through a correction, especially where there is a distant investment horizon.”
“The converse is also true. Stocks that fail to respond to positive market moves, and lose ground when the broader market slips, could be inherently weak.”
“These stocks should be prime candidates for cutting, but there are psychological barriers to this approach,” he says.
“Nobody likes to admit they’re wrong.”
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.