Let's Finally Look at Risk Realistically

A big theme in my writing has been position-sizing.

That is, in the context of portfolio risk management as opposed to managing risks of individual short-term trades. A reader emailed, telling me he had put 15% to 30% of his client assets into the Rydex Managed Futures Fund(RYMFX Quote), which I own for clients and have written about several times. During the bear market, the fund is up in a down world. The reader felt very good about the result he delivered for clients and wondered why I only put 5% in the fund. (It's actually more like 2% to 3% in the fund, and 5% in the absolute return space spread over two funds.)

The objective of RYMFX is a steady return regardless of the broader equity market. There are many funds that attempt to do this and, in its very short time trading (not quite two years), the fund has lived up to its billing. I have faith it will continue to do so but, of course, my faith cannot ensure future success of the fund.

The double bear market that has occurred in this decade has shown us that anything can meltdown for an unforeseeable reason -- well, not reasonably foreseeable anyway. Being able to predict what could blow up becomes far less important if there are no big bets placed on any one product or outcome.

This ties in with a point I have made a few times on my blog over the past few years that must be reviewed and understood. The chart is of Qualcomm(QCOM Quote) from 1999. On a split-adjusted basis, the stock went from $3.05 at the start of 1999 to $82.95 at the end of the year -- a colossal profit. Over the following 12 months, the shares dropped from $82.95 to $38.71. In 2001, Qualcomm declined to $23.78, and in 2002 it slumped to $17.14.

Qualcomm's share performance in 1999