Risk management

hey all

what’s your approach to risk mgmt (not performance-wise)? i.e. max exposure in % to ‘single points of failure’ like:

  • a single asset class
  • a single broker
  • a single currency
  • a single country
  • a single industry
  • a single etf issuer
  • a single stock/company
  • etc.
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For now I am fine with what I have. Maybe later.

You have an exposure if you invest in cash or fixed income. I would only invest in CHF denominated instruments.

I avoid it automatically by investing globally. This is because I don’t care about individual countries, industries or stocks, not really for risk management.

  • a single asset class: No limit. Very high equites share is the best strategy in the accumulation phase (was at least prior to the recent interest rate hikes)

  • a single broker: 100k cash, don’t care about total share of investments

  • a single currency: No limit. I live, work, spend, and plan to retire in Switzerland. No reason to limit my CHF exposure. Limitation comes through regional allocation automatically to some degree, but with equities it’s complicated anyway (do you for example consider a Nestle share a CHF investment?)

  • a single country: Region not country for me, 50% (need to watch North America/USA exposure)

  • a single industry: 20% (need to watch technology)

  • a single etf issuer: No limit

  • a single stock/company: 3%

  • I add minimum single asset class: 5%. I do not uphold my own rule, and am too equity heavy. It is important however to diversify and add bonds, alternative assets like PE and commodities. Also I still have not invested anything in crypto, but might make sense from a risk perspective.


Currently 100% total international stock market, not currency-hedged, one broker.

As I’m on the verge of early retirement, I’m planning to diversify more into treasuries, gold, commodities, cash and maybe some trend-following, probably resulting in a 70% equity, 30% other assets.

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one question for all re ‘single country’ risk:

who thinks a huge ch weighting (‘home bias’) is too risky, but a huge usa weighting (‘all-world index’) is not?

i’m not talking about smi-like weightings of nesn/novn/rog, but adjusted and comparable to the us index.

yes, i know, ch vs. world market cap is tiny. but isn’t it all about the changes from here / development in the future? both could win or lose market share, out- or underperform, no?

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Imho, assuming an efficient market, geographical risks are already priced in, so market capitalization is by definition the ideal geographical allocation.


but every index is biased, right? i mean, someone determines which countries are ‘developed’ (for msci world) or ‘developed or emerging’ (msci acwi) or neither (~150 other countries). and then, which companies per country are in the index. is it the top sized ~85% each? or the top-sized 10% from all of 'em? there’s also a difference between the ‘cap-weighting mechanism’ (how to rebalance) and the ‘size-orientation’. biggest 10 companies in the world are not necessarily the best, nor the safest 10 in the world. and there’s still a nation / political system behind every country. let’s say 20 yrs from now, msci acwi is 80% usa (i know, how realistic). would you not care, because single country isn’t that relevant, or start reducing that weight? and would you not allocate 40% to ch simply because its size is not big?

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I‘m also holding individual stocks.

That said, I‘d be less concerned about ETF issuers.
Countries may fail because of politics. Broker may fail because of bad risk management, IT security etc. Even fraud, maybe.

An ETF though? Seems pretty straightforward and not too many vectors for fraud - and I doubt I can be wiped out in a singular event, such as someone hacking my account/credentials.

I haven’t really been in a situation where I was about to invest (close to) 100% of my liquid net worth into a single security. Most of my brokerage accounts don’t have access to U.S. ETFs anyway.

As for countries, I‘m not sure if I have (partly) reversed my opinion on this over the last year or so. But it’s just hard if not impossible to ignore (underweight) the U.S. at this point. While the U.S. got rid of their Trump (for the time being), Europe got new problems with the Ukraine war and cutting itself off from cheap Russian energy. But as far as alternate universes go, there are some in which Trump didn’t peacefully hand over power after the election and Putin may have decided not go all out on Ukraine. And the junctions between them are just a handful key decisions taken (possibly only on a whim) by these two world leaders.


hmm, i’d say market cap weighted somehow means ‘large size factor’ by design. a single country, sector or company can become a huge part of an index. so the index needs / would need rules to cap at a certain weighting each to consider it risk-managed by itself, no? an investor is never totally passive, we choose our asset classes, indices, etc. the swiss perf index (spi) is a good example, we probably wouldn’t allocate a huge part of our pf’s to it.

There is a simple mathematical parameter describing diversification of a portfolio:

You may want to take a look at it.

And I also see that this website even provides calculated HHI for ETFs:

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I think Bessembinder showed that only 4% of the U.S. stock market’s companies accounted for its entire gains. My guess is it’s similar for the global stock market. To me, it would be a risk not to weight these companies according to market cap.

Market cap makes intuitively sense to me because it simply follows the fundamental principle of supply and demand. Also, I wouldn’t really know what other principle to choose.

But of course, many ways lead to Rome, as long as you stick to them :smile:


yep, or at least that’s the company-level diversification.

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Sure, equal weight might work fine too, I believe there’s an interesting equal-weight ETF for the S&P500: RSP.

To my understanding, the market is pricing stocks mainly forward looking, based on expected returns. That also explains why there can be stock market bulls in economic recessions.

Higher demand for that company’s stock implies that the market thinks it will. Hence, by underweighting this company, you assume to know more about it than the market.

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Company 1 has a higher market capitalization than company 2 because company 1 is expected to earn more than company 2. Earnings define valuation.

Normally and, say, as a base scenario, there is no supply of new shares. The price is based on valuation of the price of a single share.

Could be also related to the fact that valuations of smaller companies are more volatile.


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Well, I think you are right! Not a specialist in finance, but my understanding is: according to the efficient market hypothesis, at any given moment the price of a share of every company corresponds to the discounted value of all future earnings minus risk-based haircut. So theoretically you can buy any share and have the same expected return, even taking the risk into account. But practically the possible range of outcomes for a single company is from getting bankrupt in 1 year to becoming “next Apple/Amazon/etc.”. If you are gambling, sure, pick your horse. But if you want to live from your portfolio and want to have “reliable” (as good as it gets) outcomes from the stocks market, you have to diversify. Then the law of large numbers starts to kick in and you have much lower variability of outcomes.

And there are seem to be some financial models that shows that market capitalization weighted stocks portfolio have the best risk-return profile, although I was not be able to find it quickly.


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Not necessarily. The link does point out an overperformance of large cap stocks - though that’s not necessarily due to market cap weighting. The article in fact states that “The calculations assume an equal-weighted portfolio”.