RISK MANAGEMENT

DIVERSIFICATION
Diversification is a fundamental principle in risk management within an investment
portfolio. It involves spreading investments across different asset classes, industries,
sectors, and geographic regions. The primary benefit of diversification is to reduce
the overall risk of the portfolio.
● Risk Mitigation:
Diversification helps mitigate(reduce) the impact of poor performance in any
single investment or asset class. When one investment underperforms, others
may perform better, helping to offset losses and reduce the overall volatility of
the portfolio.

● Stability in Returns:
By including a variety of assets with different risk-return profiles, diversification
can contribute to a more stable and consistent return pattern over time. This is
particularly important for investors seeking a balanced and predictable
investment experience.
● Reduced Impact of Single Events:
Unforeseen events, such as economic downturns or geopolitical crises, can
have a significant impact on specific assets or sectors. Diversification helps
reduce the impact of such events by ensuring that the entire portfolio is not
overly exposed to any single risk factor.
Investors should carefully consider their investment goals, risk tolerance, and time
horizon when implementing a diversified strategy.

ASSET ALLOCATION
● Stability in Performance:
By combining assets with varying risk-return profiles, asset allocation aims to
provide a more stable and consistent performance over time. This stability can
be particularly important for investors seeking a balanced and predictable
investment experience.
● Risk-Return Optimization:
Asset allocation allows investors to optimize the risk-return tradeoff. By
selecting a mix of assets aligned with their risk tolerance and return
objectives, investors can pursue returns while managing the overall risk
exposure of the portfolio.
● Risk Diversification:
Asset allocation helps diversify the portfolio by spreading investments across
different types of assets. Each asset class reacts differently to market
conditions, economic events, and other factors. Diversification reduces the
impact of poor performance in any single asset on the overall portfolio.
Asset allocation is a powerful tool for managing risk in an investment portfolio. It
provides a strategic framework for achieving a balance between risk and return,
considering an investor's unique financial circumstances and objectives. It's
important for investors to periodically review and adjust their asset allocation in
response to changes in their financial situation, market conditions, and investment
goals.

STOP-LOSS ORDERS
Stop-loss orders are a risk management tool used in investment portfolios to limit
potential losses. These orders are placed with a broker to automatically sell a
security if its price falls to a specified level.
● Risk Control:
Stop-loss orders enable investors to control the amount of risk in their
portfolio. By setting specific percentage or dollar-based thresholds, investors
can manage the maximum loss they are willing to tolerate on a particular
investment.
● Automated Execution:
Stop-loss orders are executed automatically when the specified price level is
reached. This eliminates the need for constant monitoring of the market and
provides a proactive risk management approach, especially for investors who
may not have the time to closely track their investments.

The aim of a stop-loss order is to limit an investor's loss from an investment if

that investment falls in value. If the share price falls sa specific price level or
percentage nga gipili sa investor, the stop order may be triggered
automatically, and the holding sold. And ma baligya dayon ang hodling, dili na
ma delay or masayang

For example, setting a stop-loss order for 10% below the price at which you
bought the stock will limit your losses to 10%.
During a recession, the economy experiences a significant decline in economic
activity, typically measured by a contraction in gross domestic product (GDP) for two
consecutive quarters. Recessions can have widespread effects on various aspects
of the economy, including the financial markets and investments. Here's how a
recession can impact investments:

Stock Market Decline:

Recessions often lead to declines in the stock market. Economic uncertainty,
reduced corporate earnings, and investor pessimism can contribute to a sell-off in
equities. Investors may see the value of their stock portfolios decrease during a
recession.

Currency Fluctuations:
Recessions can influence currency values, with some currencies depreciating
against others. Investors with exposure to foreign assets may be affected by
currency fluctuations, impacting the returns on those investments.

Diversification and Risk Management:

Diversification across different asset classes can help manage risk during a
recession. While some investments may experience declines, others may be more
resilient. A diversified portfolio can help mitigate overall losses.

Working with a financial advisor and staying informed about economic indicators can
also contribute to making well-informed investment decisions during challenging
economic periods.
Inflation and interest rates have profound effects on various aspects of the economy,
including investments. Here's how inflation and interest rates can impact different types of
investments:

1. Fixed-Income Investments (Bonds):

Inflation: Inflation erodes the purchasing power of money over time. For bond investors, this
means that the fixed interest payments they receive may have reduced real value in periods
of high inflation.
Interest Rates: Bond prices and interest rates have an inverse relationship. When interest
rates rise, existing bonds with lower yields become less attractive, leading to a decline in
their market value. Conversely, falling interest rates can increase the value of existing bonds.

2. Equities (Stocks):
Inflation: Inflation can affect companies in various ways. While some companies may be
able to pass increased costs onto consumers, others may experience margin pressures.
High or unexpected inflation can introduce uncertainty, impacting stock prices.
Interest Rates: Interest rates influence the cost of borrowing for companies. Higher interest
rates can increase borrowing costs, potentially affecting corporate profitability. However,
moderate and predictable interest rate environments can be favorable for stocks.

3. Real Assets (Real Estate, Commodities):

Inflation: Real assets, such as real estate and commodities, are often viewed as hedges
against inflation. In times of rising prices, the intrinsic value of real assets may increase,
preserving purchasing power.
Interest Rates: Real estate values can be sensitive to interest rates, particularly in terms of
mortgage rates. Higher interest rates can increase borrowing costs for real estate
transactions, potentially affecting property values.

4. Cash and Cash Equivalents:

Inflation: Holding cash during periods of inflation can result in a loss of purchasing power.
The nominal value of cash remains the same, but its real value decreases as prices rise.
Interest Rates: Cash and cash equivalents, such as savings accounts and money market
funds, generally provide returns in line with prevailing interest rates. Higher interest rates can
lead to higher returns on these investments.

5. Foreign Investments:
Inflation: Inflation rates can vary across countries. When investing internationally, investors
should consider the impact of inflation on the local economies of the countries in which they
are invested.
Interest Rates: Interest rate differentials between countries can affect currency values.
Higher interest rates in one country relative to another may attract foreign capital, potentially
leading to currency appreciation.
 6. Dividend-Paying Stocks:
Inflation: Companies with a history of paying dividends may adjust their dividend payments
over time to keep pace with inflation. Dividend-paying stocks, particularly those with a track
record of increasing dividends, can provide a degree of protection against inflation.
Interest Rates: Dividend stocks may be influenced by interest rates, especially when viewed
as income-generating investments. In a rising interest rate environment, some investors may
shift to fixed-income assets, potentially impacting the performance of dividend stocks.

7. TIPS (Treasury Inflation-Protected Securities):

Inflation: TIPS are designed to provide protection against inflation. Their principal value
adjusts with changes in the Consumer Price Index (CPI), ensuring that investors receive a
return that keeps pace with inflation.
Interest Rates: Like other bonds, TIPS prices can be influenced by changes in interest
rates. However, the inflation protection aspect is a distinguishing feature that may mitigate
interest rate risk.

Investors should carefully consider the interplay of inflation and interest rates when making
investment decisions. Diversification across asset classes and regions can help manage
risks associated with economic fluctuations. Additionally, staying informed about
macroeconomic indicators and central bank policies is important for understanding the
broader economic environment.

interest rates and bonds have an inverse relationship: When interest rates rise, bond prices
fall, and vice versa. Newly issued bonds will have higher coupons after rates rise, making
bonds with low coupons issued in the lower-rate environment worth less.
WHY CASH EQUIVALENTS?

Liquidity and Accessibility:

Cash equivalents, such as money market funds and short-term government securities, are
highly liquid. They can be easily converted to cash, providing investors with quick access to
funds when needed. This liquidity is beneficial for meeting short-term financial obligations or
taking advantage of investment opportunities.

Capital Preservation:
Cash equivalents are considered low-risk investments, providing a high level of capital
preservation. While they may offer lower returns compared to riskier assets, the principal is
generally secure, making them suitable for preserving wealth and safeguarding against
market downturns.

Risk Mitigation:
During periods of market uncertainty or increased volatility, holding a significant portion of
the portfolio in cash equivalents can act as a risk mitigation strategy. It provides a buffer
against market fluctuations and potential capital losses that may occur in more volatile
assets.

Emergency Fund and Contingency Planning:

Cash equivalents serve as a stable component of an emergency fund, providing financial
security in case of unexpected expenses or income disruptions. This can contribute to
financial resilience and reduce the need to liquidate other investments during emergencies.

Flexibility for Strategic Allocation:

Maintaining a cash position provides flexibility for strategic allocation adjustments. Investors
can deploy cash into other asset classes when they perceive favorable market conditions or
rebalance the portfolio based on changing investment objectives.

Income Generation:
While the returns on cash equivalents are generally lower than riskier investments, they still
provide some level of income in the form of interest. This can be particularly appealing for
conservative investors seeking a steady income stream with minimal volatility.

It's important to note that while cash equivalents offer stability and liquidity, they may also be
subject to the impact of inflation, which can erode purchasing power over time. Investors
should carefully assess their financial goals, time horizon, and risk tolerance to determine
the appropriate allocation to cash equivalents within their overall investment strategy.