CHAPTER 2
SETTING PORTFOLIO
AND RISK GOALS
‘If you do not think about the future, you cannot have one.’
—John Galsworthy, Swan Song, 1928
I
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.
34
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

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