The Markets May be Rebounding, but Risk Management Remains Crucial

In the wake of one of the strongest starts to a year in recent memory, the markets seem to be finding their feet.

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As a result of roughly $300 billion in short coverings, bearish bets have turned to neutral while stocks with the worst profits have soared.

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The most shorted stocks outperformed the least shorted stocks by 14 percent so far in 2023 when earnings missed estimates, according to Trade Algo.

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Many people who lost a lot of money last year are afraid of missing out this year. It was estimated by JPMorgan Chase & Co. and cited by Trade Algo that retail investors accounted for 23 percent of total volume in late January, which is higher than the 21 percent during the 2021 meme mania.

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In the face of a balanced fund loss of between 12 to 15 percent last year, money managers must be just as susceptible to this euphoric behavior.

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The Nasdaq lost 33.5% in 2022, but is up nearly 15% this year, making it more important for managers in high-risk sectors like technology.

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Thus, portfolio positions affect how data is interpreted and the outlook generated, which is not the case. Market participants expect interest rates to fall once again, supporting riskier and longer-term investments.

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At times like these, we suggest that you take a step back and try not to let your past results affect you in the future. Many don't seem to be asking what would happen if this year's rally was just another head fake, as was the case in 2022. Can central banks maintain current rates or, even worse, raise them if inflation stays low?

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It is crucial to managing risk along with return even after a market correction since the following year won't always be a good one. It's more gambling than a strategy to place your portfolio in black or red.

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While we may be in the minority, we do not need either dovish or hawkish scenarios to play out to make money, so we are positioned to make money regardless of which scenario plays out. It's not all about dualistic investing, but rather investing with a risk management strategy based on goals.

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As a result, we are still focused on stocks and bonds with shorter durations. We are receiving almost five percent of our cash weighting. Structured notes with yields above and below double-digits and downside barriers of 30 to 40 percent are really overweight in our portfolio. As for S&P 500 positions, we still have some energy, some long-term global value, and even some tech.

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As a result, these strategies may not be as appealing to people who lost double digits last year since we protected the majority of last year's correction. Even so, we would still consider a repair strategy as long as it does not involve doubling down on what caused your problems.

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To achieve one's financial goals and objectives, one's best bet is to balance taking risks with generating returns, rather than chasing markets. While this may be an old-school approach to money management, it is sometimes the old school that gets the most Valentine's Day cards.