Managing risk, from the amateur perspective

At the beginning of my investing life, I was foolish. I accepted the truism that, having 3+ "market cycles" in me, I could ride out volatility and be rewarded for accepting more risk.

In retrospect, I should have followed a very conservative, capital preserving, modest but steady earning strategy until the foundation of my retirement corpus was built, then blend in some higher risk stuff when the price of a failure or two didn't hurt so bad.

I learned the first lesson on stocks like JDS Uniphase and Cisco in the tech boom. The rapid evaporation of 50% of my portfolio value taught me that I am, in fact, a risk adverse person.

A more difficult lesson was learned a number of years later when my investment in Washington Mutual rapidly declined to near zero. That company had a steady, slowly rising stock price, a nice steady dividend payment, moderate payout ratio, etc. Now then, how was I to know the the place was built on selling liar's loans? Well, fortunately I was fairly well diversified, but WaMu was still 5% of my portfolio and I had no clue what their real business model was. I thought they accepted deposits and wrote 30 year fixed FHA secured loans. Silly me....

I bought Bank of America, with it's nice fat 5% dividend, after it had grown to the biggest retail bank in the nation. I wasn't aware it was about to swallow Countrywide, Merrel Lynch, had put it's own foot into the mortage backed securities market and was about to swallow untold billions of dollars of credit default swap risks as it absorbed ML in a bid to become the biggest mega-bank on earth. The hubris of it all!.... and Ken Lewis took home his millions-upon-millions even as he went from genious to reckless, feckless fool in the eyes of the investing public. Silly me....

Interestingly enough, I was able to recoup alot of those losses by buying the preferred stocks of BofA and Countrywide at 50 cents on the dollar and watch them skyrocket as we emerged from the cold hard winter of 2009. They are still paying me in excess of 8% interest.

Then again, I have owned Duke Power for several years, which has paid a steady and rising dividend over the years, spun out a solid subsidiary and continues to perk along, not rising a lot in value, but allowing me to DRIP my way to a rising stream of dividends. Their business model isn't all that difficult to understand. They operate in the regulated utility space, along with some real-estate investments, some unregulated power production and have a rising portfolio of renewable energy in the form of wind and solar power installations. Come hell or high water, people will pay to keep the electricity on, until they are tosse out on the street.

I have purchased stocks in the energy field. However, rather than expose myself to the volatility associated with the price of oil and gas, I have found a more steady home with pipeline MLPs and MLPs who hedge the price of their production several years into the future, so as to make the cost of production and the expected earnings more predictable over time.

within the utility and energy space, I'm diversifying geographically and by multiple energy sources. This is a good space to look for international opportunities, like telecoms that pay nice dividends in countries where the penetration of communication systems is incomplete and still rapidly growing.

If the whole world goes into a blue funk, like it did recently, there is probably no completely safe haven, but I was fortunate to have made this transition in my philosophy before the biggest downdraft, and I am happy to report that I have emerged from the last year having completely recouped all my losses and come out nicely ahead of where I was in 2007-2008. It could have been a lot worse.