How to reduce your portfolio's risk

Get 3 key investor take-outs, on what you need to do to reduce risk with rising inflation.

In keeping with our mantra to Protect with Blue Chips, Grow with Small Caps, we spoke to Blue Chip Value’s Portfolio Manager Sam Ferraro about the upcoming portfolio rebalance, drilling down on each sector and the macro picture.

Summing up, he says:

I’m looking to preserve capital during this period of rising interest rates.

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3 Investor Takeouts

  1. The big picture takeout for investors is that the central bankers don’t have a choice and have backed themselves into a corner and must continue to raise official interest rates.

  2. In response Sam Ferraro is reducing our portfolio’s “beta”, which is its correlation to the market in order to reduce our risk.

    Some stocks have a bigger correlation than others.

    Some are more market sensitive such as cyclical stocks whose earnings ebb and flow dependent on the amount of economic activity out there

  3. Now is the time to invest in companies that have a more stable earnings profile because their products are necessities no matter what’s happening in the world. These include utilities and infrastructure stocks, as well as some Small Caps.

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The US Federal Reserve

US Fed Reserve Governor Jerome Powell famously stated late last month at Jackson Hole that he would do what it takes to get inflation down by raising rates. In the wake of these hawkish comments, expectations have hardened for a third 75 basis point rise in a row of the official US overnight rate, lifting it from 2.5% to 3.25% later this month.

The benchmark US 10-year Treasury bonds are now yielding 3.3%, which is their highest level since 2011, so the highest for a decade

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What does this mean?

In basic terms it’s an official acknowledgement that the economy is running too hot for supply to keep up, with the result being a continuation of the high inflation rate, which is running at 8.5% in the US and in Australia it’s expected to be at 7.75%.

The cost of living goes up and people don’t have the ability to pay for essential goods. Rising inflation is a global phenomenon and the RBA’s Philip Lowe has been making similar pronouncements to Powell.


What's happening in the US?

It means that aggregate demand is running at higher levels than the price stability implied by the US Federal Reserve’s 2% inflation target. Powell saying that he’ll do what it takes highlights that the Fed is trying to claw back lost credibility, which he knows must be backed up with hard actions, in the form of rate rises.

Blue Chips are valuable in reducing the risk of your portfolio, but so are Small Caps. The more you hedge the market, the less risks you have in your portfolio. Ultimately growing your value is about being patient and buying stocks with good fundamentals.

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Richard Hemming

Richard Hemming

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Richard is a leading market commentator and expert on ASX Small Caps provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (ASFL: 409518). The author does not own shares in any of the stocks mentioned.

Under the Radar Report is licensed to give general financial advice only (ASFL: 409518). The author does not own shares in any of the stocks mentioned.

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