How to minimize market risk or portfolio management options for equity investors.

When it comes to market risk minimization, two principles come into play: diversification and right asset allocation. First, let's start with diversification. You may have heard the expression, "don't put all your eggs in one basket." This applies to the diversification principle, meaning that it is generally a bad idea to rely on a single stock. Investing in equities is very risky because there are so many factors to consider, and sometimes they are contradicting each other. You can't really know how one specific factor can affect your stock price. That's why market risk is sometimes called uncontrollable risk. Diversification allows you to gather stocks from different industries with different trading parameters (liquidity, volatility, trading irregularities). If one stock declines, another can raise, and you can protect your capital from a sharp decline. Right asset allocation is also important as it examines stocks' trading parameters to tell you what can be the optimal asset allocation in your portfolio to minimize losses. In short, right asset allocation tells you what should be the weight of each stock in your portfolio to minimize its loss as much as possible or maximize its expected return. In today's article, we will consider different options for market risk minimization and utilize the principles mentioned above. First, let's start with manual portfolio building, and then I will show you one easy option that you can use if you have no time to build an efficient investment portfolio manually. Since we are talking about market risk in this article, I will only be talking about stocks.

Manual market risk minimization.

For manual portfolio building, you should start with stock selection. Find stocks that you like, companies you believe in, that have strong fundamentals. Then calculate your selected stocks' target prices using the DCF valuation model or the Price-Income valuation model, sometimes also called the Financial Ratios Model. When choosing companies, ensure they are from different industries to ensure that if one industry declines, another industry will rise. When you find great stocks with amazing growth potential and strong fundamentals from different industries, it's time to allocate assets properly to minimize portfolio loss, this process is called building an efficient portfolio.

To build an efficient investment portfolio, you can use the Markowitz model. For that, you need to download stock closing prices (the larger the period, the better). I usually take a 5-year period and download stock closing prices for every day. Then I calculate percentage changes for each stock for every day for the 5 years. Build a variance-covariance matrix to see the dependency of each stock and calculate the portfolio's variance, standard deviation, and return. Allocate assets weights in such a way as to minimize its loss. You can build it in Excel and use the Excel's Solver tool. These calculations are time-consuming, and you need to undertake them regularly, preferably quarterly or even monthly, as stock trading parameters may change, and company fundamentals may also change. You may also wish to add another stock to your portfolio and you will need to undertake those calculations again.

Quick market risk minimization option, ETF selection.

Now let me show you another option that you can use to build an efficient portfolio and get great diversification quickly. For that, you can choose to buy an ETF. ETF is a financial instrument that can track different assets. It can track stocks, fixed income, FX, commodities, or can track multiple different financial instruments. ETFs are issued by investment banks and brokerage companies. They basically select assets for you, do diversification, and make sure the portfolio is efficient. Then, when they have a pool of financial instruments, they register it as a single product on the stock exchange and issue it as an ETF. The advantage of owning an ETF is that you don't have to do manual calculations and manually search for stocks. Another great advantage of ETFs is that you only pay one commission when you buy the ETF, but with individual stocks, you have to pay commission every time you buy an asset. ETFs can have different parameters, such as risk, efficiency, performance, and you have to check what financial instruments it tracks and from which industries. You need to learn how to analyze ETFs to understand what you are holding. You should also examine what individual stocks it tracks (if you have chosen a stock ETF). You can also have multiple ETFs in your portfolio. They will usually generate a slower return than individual stocks, but the advantage of holding an ETF is that they will not fall as fast as individual stocks. To extract ETF information, you can use Financial Modeling Prep ETF Information API.

I have described manual and express approaches that you can use to minimize your market risk. This knowledge is important if you want to survive on the stock market and generate positive returns over the longer term.