When once I am fully invested in my new Hawking Portfolio I will be posting a very detailed/advanced explanation of what I am expecting in terms of performance and how I plan to manage the portfolio. The details in that post may not be of interest to many members and you will definitely need your tea and cookies (Dick) to stay awake. However, those who like tinkering (Mitch) might find some interesting ideas.
The purpose of that post will be to illustrate how I manage a “real”, live portfolio – however, the ideas (rather than details) I want to convey can be illustrated more simply as I shall try to do in this post – and this is probably more important for most members.
First, an investor should have a mental (or physical) image of how his/her portfolio might perform over a range of market conditions. Generally, this image will look something like the one shown in the figure below:
Thus, we recognize that we will make money if the “market” goes up and will lose money if the “market” goes down – the red line in the figure above. However, if we are thinking “Risk Management”, we probably want to restrict our losses to the downside – so our mental image might look something like the red line shown in the second figure below:
But, in the back of our minds, we would probably prefer to see something closer to the red line to the upside and the yellow line to the downside. If we have a little more confidence and understanding we might then like to achieve something like the red or yellow lines shown in the 3rd figure below:
Eventually, we might want to generate returns more like the green line in the above figure.
I’m not suggesting that it is always possible to achieve performance corresponding to the above images – although I’m not saying it’s impossible either. I believe it’s important to keep images like these in your mind to remind yourself of what you are trying to achieve. The next step is to educate yourself as to how this might be achieved. Obviously you’re not likely to replicate the performance of the green line to-morrow – it’s going to take a lot of dedication and knowledge – but you can certainly achieve the performance of the red line in the second figure above simply by following the basic (ITARR and SHY Filter) Risk Management procedures described on this site.
I hope this simple illustration will set the stage to explain the detailed explanations I will be posting when I describe the expected performance of the Hawking Portfolio.