Markets and companies
Market risk is inescapable, but can be tempered through diversification. The same goes for the risk that a favorite stock in your portfolio could be the next Enron or Bear Stearns.
“The Seven Immutable Laws of Investing,” published recently on the website of investment firm GMO, highlights three key risks all investors should understand: valuation risk, or overpaying for an asset; fundamental risk, buying something that turns out to be flawed; and financing risk, using leverage.
Before committing your money, said James Montier, part of GMO’s asset-allocation team and author of the article, “always insist on a margin of safety.” Put simply, don’t get carried away. As the U.S. stock market moved fitfully through 2007 and early into 2008, Montier recalled, “people were acting with no regard to a margin of safety. Everyone was reaching for return and behaving very badly. We knew it wouldn’t end well — just not when.”
Your best bet: Don’t overlap markets or sectors, and avoid concentration in similar stocks and mutual funds. For the stock portion of your portfolio, consider mutual funds that have beaten a market benchmark with considerably less volatility.
For example, a search of the Morningstar database turned up a handful of funds that topped the S&P 500 over the past three years with no more than two-thirds of the market’s volatility. Those making the cut include Neuberger Berman Select Equities , CAN SLIM Select Growth and Reynolds Blue Chip Growth .
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