When it comes to managing risk, the efficacy of certain techniques never wanes. One such methodology is asset allocation and diversification. This passive technique is rooted in the notion that it is never a good idea to concentrate all of one’s holdings in one asset.
DC Witter Group builds all portfolios with weighting in different types of assets; securities like equities, bonds, mutual funds and commodities offer differences in their cycles meaning that when one or more of them are in correction territory, there is a good chance that one or more of the others are in growth mode.
This technique can be further refined by diversification within the specific asset class. For example, within the equities holding of a portfolio, it is good practice to hold stocks of companies in differing industrial sectors. Raw materials, financials, utilities and retail offer useful variety that further helps with risk mitigation. For example, if financials were to enter a challenging period that saw their stock values fall, utilities and raw materials shares could potentially rally as investors rotate into stocks with less exposure to banks and the like.
There are times when risk management methodology needs to be more responsive than that offered by the passive, built-in mitigation of asset allocation and diversification. DC Witter Group uses various alternative methods to mitigate risk in certain markets and in situations where the positions we have taken in the market are exposed to higher levels of risk, albeit on a temporary basis.
These methods can include taking short/long positions in markets or securities cyclically-opposed to those in which our clients have holdings as well as diligent use of derivatives like options and futures contracts.