The Market Screams “Risk Off!” — Are You Prepared?

market risk - The Market Screams “Risk Off!” — Are You Prepared?

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I’ve been talking a lot lately about market risk. Most investors just look at performance over time and never really assess the risk that is inherent in a given portfolio. Most investors also just invest without any kind of long-term plan. Both of these considerations are important, especially when the market looks like it does currently.

Lately the market has been giving us a lot of different signals in regards to risk. Many investors might not understand what the signals are, and when they realize that the signals compound the inherent risk in the portfolio, it may suddenly occur to them that they may have exposed yourself to even greater amounts of risk.

See my investment advisory newsletter The Liberty Portfolio for a service that focuses on long-term, low-risk investing.

Remember it was this time last month when the market went nuts. This was ostensibly triggered by computer programs reacting to the increase in the 10-year bond rate, to almost to 3%. So many things can increase the risk of a portfolio.

What Are Other Market Risk Factors?

The February jobs report is going to be released soon. There is a lot of market risk surrounding this particular event. Because if the number comes in too high, it implies inflation, that is, the economy is heating up too quickly. That in turn might encourage the Federal Reserve to raise rates.

As rates rise, the comparative risk-free investment in government bonds begins to challenge riskier assets such as stocks. Therefore stocks are more likely to sell off.

If you were to look at a chart of the CBOE Volatility Index (INDEXCBOE:VIX) overlaid with rate yields, you would see that for the first time a very long time they are not correlated. Correlation means that as bond yields go up, volatility increases. When volatility increases, risk goes up enormously. Volatility is equivalent to risk because as rates go up, stocks are being sold off.

How Can Investors Protect Themselves From Market Risk?

Investors looking to mitigate market risk should have a long-term diversified portfolio with a substantial number of holdings in alternative investments.

What are alternative investments? Alternative, or “non-correlated” investments are investments that do not move lock-step with the overall market. That tamps down volatility, which means risk is reduced.

If you are looking at your own portfolio right now, there is a low probability that you have any alternative investments or non-correlated investments in there by accident. Therefore that portfolio is very likely to be subject to very high volatility, and very high risk.

Wouldn’t it be great if you didn’t have to worry about things like 10-year bond yields and volatility correlation? Or any of the other crazy things that happened minute-by-minute and are reported to you in the financial media? That’s what a long term investment horizon and non-correlated investments bring to you.

Non-Correlated Investments to Reduce Market Risk

Oaktree Capital Group LLC (NYSE:OAK) specializes in various forms of debt securities. It makes investments in distressed businesses with the intention of turning things around and reaping returns of multiples of their investment.

Guggenheim Alpha Opportunity Fund Class C (MUTF:SAOCX) buys and shorts large baskets of stocks. That creates a fund that is market neutral, or non-correlated to the overall market but that will still benefit from the positive or negative movement of the stocks it holds.

IndexIQ IQ ARB Merger Arbitrage ETF (NYSE:MNA) invests in companies which are going through a merger. Often, the acquired company’s stock trades below the target merger price. The fund goes long the target stock while shorting the acquirer’s stock. If the deal goes through according to plan, the target company’s stock will rise to the proposed buyout price and the acquiring company’s price will fall to reflect the ultimate final price for the deal.

There are other companies like Enova International Inc (NASDAQ:ENVA) which makes short-term and installment loans to consumers. It is very profitable but has little correlation to the market. The same goes for debt collection companies like Encore Capital Group, Inc. (NASDAQ:ECPG), which collects delinquent debts of all kinds from all over the world.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at He owns shares of OAK, ENVA, and EPCG. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at

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