AND RISK GOALS
‘‘If you do not think about the future, you cannot have one.’’
—John Galsworthy, Swan Song, 1928
tisalltooeasyfor long-term plans to go off course.
When your portfolio is designed as a good match for your
goals (in terms of risk, for example), you are on the right
track. But for many investors, over time the portfolio
changes, and so do the goals. When a portfolio ends up
being a poor match for your goals, you are in trouble.
In this chapter, essential portfolio planning attributes
are presented and explained in terms of how you might use
options. However, as with any plan, even a sound option
strategy for one person is not appropriate for another.
When the conditions of your life change, your portfolio
has to keep up. The major occurrences in life that may
radically change your investing goals include marriage,
change of career, buying a home, having children, divorce,
and illness. Any of these events can certainly threaten your
investment portfolio’s overall health, not to mention the
risks you face and the types of products you need to select.
35Setting Portfolio and Risk Goals
Since you have to balance multiple concerns in your
portfolio, it is important to deﬁne what you want to
achieve. You have to be concerned with market risk and
liquidity and with the fortunes of a company that might be
strong today but not necessarily in the future.
If you look back 50 or 75 years, some of the strongest
and most dominant companies in the United States were
General Motors, Kodak, and ITT. Today, the situation has
changed dramatically. The market is now dominated by
foreign cars, digital cameras, and numerous telephone
companies (including cellular technology), all of which
were difﬁcult to imagine only a few decades ago. It is also
likely that in the future, the same kinds of technological
advances will make many of today’s strongest industries
obsolete. The difﬁculty is in knowing which ones will suf-
fer from future changes.
No portfolio can be set in stone as a permanent and
safe collection of stocks. In the past, this was precisely
what many insiders suggested—and, in fact, the mutual
fund industry grew largely on that premise. Today’s port-
folio is more likely to change rapidly as various sectors
come into favor or fall out of favor. Examining various
kinds of risk reveals exactly how you can build your port-
folio with your goals in mind and how options can help to
keep those risks under control.
■ The Real Meaning of Market Risk
Market risk is the endless concern of investors. For some,
it is an obsession. The daily stock price movements domi-
36 Winning with Options
nate the time for many, including those who describe
themselves as ‘‘long-term investors’’ or ‘‘value investors.’’
All of the fundamental theories tell you that short-term
price changes do not matter, yet the majority of people
with money at risk follow prices not only by the day but
often by the hour.
This all-important risk affects how people invest, as it
should. But risk does not have to be an ﬁxation. Instead,
you can have the best of both worlds: You can pick moder-
ately volatile stocks with excellent prospects for long-term
growth and take advantage of the market’s tendency to
overreact to virtually everything. The key to this approach
is the selective use of options. The more troubling market
risk is to you, the more likely you are to ﬁnd options an
excellent method for cushioning that risk, and even turn-
ing it into potential proﬁt rather than exposure to loss.
The ﬁnancial media make this information available
virtually everywhere. You can create your own stock ticker
on your XM Radio; get endless information on many
ﬁnancial news television stations; and, of course, ﬁnd
streaming quotes for your portfolio on your computer, at
home as well as at work. For anyone who enjoys being a
‘‘stock ticker junkie,’’ there are plenty of dealers out there.
Market risk is continually kept in front of everyone, and
you are constantly reminded (especially while the markets
are open) that the slightest blips in consumer conﬁdence,
oil prices, interest rates, earnings, or new products are
likely to cause your stock’s price to soar or to plummet.
What does market risk really mean? Is it limited to the
endless plus and minus price movements? Some stocks
are quite erratic and tend to move with the market, often
in exaggerated fashion. But with a long-term perspective,
even volatile stocks are going to change in price over many
months or years based on the company’s fundamentals.
Some market watchers like to argue that technical and