Risk Management

We define Risk Management as: the art of keeping portfolio exposure to market risk “in-line” with the prevailing market conditions at all times.

The goal is to keep portfolios mostly invested during positive market cycles and to reduce exposure to market risk during severe market declines.  While there are never any guarantees in investing, doesn’t it make sense to have a strategy that attempts to lose less during severe declines?

Why is Risk Management Needed?
To answer simply…to reduce exposure to market risk. It is safe to assume that no investor would have intentionally remained fully invested during the “Tech Bubble” Bear Market, which occurred between 3/31/00 through 3/31/03 where the average Growth Fund (as defined by the Lipper Large Cap Growth Fund Index) lost -64%...and needed to gain more than 180% to get back to breakeven.

History has proven there are definitely times to be fully invested, there are times to keep some money on the sidelines, and there are times where a reduced risk profile is warranted. So, why would you want to stay fully invested all the time if you don’t have to?

In General, Mutual Funds Don’t Focus on Managing Risk!
A good reason to incorporate risk management strategies into your portfolio is traditional mutual funds aren't designed to do it for you. The simple truth is that the many mutual fund managers stay almost fully invested at all times. Why? First, because many times the prospectus requires it. Second, the sheer size of most funds precludes them from reducing exposure in any meaningful way during market declines.

The Least Loss Principle

It is VERY important to understand that no investor is immune to declines in their account during severe market delines.  However, unlike the blindly implement “buy & hope” approach, our goal is to attempt to limit the degree of pain that a severe decline inflicts on our portfolios.

While we can’t guarantee our objectives will be realized, HCM’s risk management strategies are designed to first identify, and then stay “in tune” with the market’s "big-picture” cycles. This means that when our major market models are in a bullish mode (indicating risk of a bear market is low) we will maintain a more fully-invested strategy focusing on the market leaders.

Let’s take a moment to be very clear on this concept.  Should you expect us to sell our positions at the very top of Bull Market peaks and then become reinvest at the depths of Bear Market declines?  Of course not.  Will we avoid the entire decline during Bear Market drops?  Unequivocally no…we are money managers not magicians.

In summary, our objective is to attempt to lose the least amount possible during a severe market decline.  Practically speaking, our management approach demands that we reduce exposure to market risk whenever a high-risk environment develops.