Risk Management

Warren Buffett has famously remarked that his two rules on investing are “1) Don’t lose money, and 2) never forget rule #1”. While investors can never completely eliminate the potential of losing money, we believe that proper risk management, the limiting of investment losses, is essential to successful investing. Stonebrook seeks to manage risk in investment portfolios by having proper diversification and by using defensive tactics when market trends and valuations are unfavorable. These tactics include reducing overall stock exposure, raising cash & bond holdings, and limiting the loss potential on individual holdings by clearly identifying exit strategies.


We believe that investment portfolios should be constructed by properly diversifying across asset classes. Gold, stocks, bonds, international investments, commodities, and real estate can help to reduce risk and enhance return. We seek to incorporate non-correlated assets in portfolios, which can potentially lower the volatility in a portfolio while raising its return. For example overseas stocks and gold typically have a low or inverse correlation with US stocks. When the outlook is favorable for these asset classes, their addition to a portfolio can have the benefit of both raising the return potential and lowering the overall risk to the portfolio.

Asset Allocation

Using both fundamental and technical research we allocate portfolios into the major asset classes: stocks, bonds, cash, and real assets (i.e. gold, real estate, timber, etc.). Studies have shown that this allocation decision has a greater impact on portfolio returns than individual security selection.

Stock and Sector Selection

We look at which industries and sectors to emphasize or avoid. Here we consider major trends or themes. For example currently we are interested in the impact of rising world population on the demand for food, water, and energy. We expect the burgeoning middle class in rapidly developing nations such as China, India, and Brazil to produce major investment opportunities as their consumption of food and fuel increases. After the sector selections are made we look for individual securities that are in line with both our overall strategy and the client’s goals & risk tolerances. We use a combination of technical and fundamental research throughout this process.