When to prioritize risk management

In bull markets, it’s challenging to find high-quality stocks that are trading below their true values.

Yet, searching for gems and monitoring their performances is key to effective portfolio management, says Phil Davidson, CIO of U.S. Value Equity at American Century Investments. He’s co-manages the Renaissance U.S. Equity Income Fund.

Read: Search for hidden investment gems

Through active management, he adds, you can provide a “smooth ride for [your] clients as they build wealth.” It’s best to deliver “competitive returns in rising markets and limit losses in market downturns, so you maximize returns per unit of risk taken.”

So long as people own a diversified portfolio of high-quality stocks across major sectors,” says Davidson, they may be able to enjoy “above-average yields and lower volatility” over the long term.

Read:

• Large-cap managers had strong 2013
• Mitigate risk when value investing

The only challenge, he finds, is you need to regularly show clients how you’re reducing risks and volatility. Davidson suggests you explain your approach and demonstrate that you’re “as concerned about limiting downside risk as [you are about] providing opportunities [over the] long term.”

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