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By Mitchell Clark, B.Comm.

Stocks have been choppy since the beginning of the year, and geopolitical events are now the near-term catalyst.

As a reminder, it’s worthwhile to review investment risk to equities and what you can tolerate in terms of potential downside with stocks.

As these pages are focused on the equity market, investment risk is always a priority. Portfolio risk can get lost in a bull market, but it’s still a huge part of the equation in terms of overall strategy.

There’s just so much beyond your control as an individual investor. At the end of the day, with stocks, it’s an investment in a business commensurate with a bet that its per-share worth (which is only definitive in the event of a buyout) will be recognized by a marketplace ruled by fear, greed, and emotions.

In late 1999, The Procter & Gamble Company (NYSE:PG) had an earnings miss and the stock was basically cut in half as the hype related to technology stocks was coming apart. It took five full years for Procter & Gamble’s share price to recuperate from the sell-off; and while the company was still paying its dividends, that’s a long time for any equity investor.

Stocks always correct eventually, but excessive pricing (like in other asset classes) can last for quite a while. Procter & Gamble’s long-term stock chart is featured below:

(click to enlarge)

Chart courtesy of www.StockCharts.com

In terms of portfolio strategy related to stocks, a multi-faceted investment strategy is key. This means varying holdings among industries, stock market capitalizations, dividend paying stocks, and pure-play bets.

An individual investor certainly doesn’t have to be the market, as you can create a very good portfolio with fewer than 10 holdings. (See “The Greatest Risk in Today’s Financial System”) But when shocks happen, investment risk associated with your holdings becomes the front-burner issue.

This is why I view portfolio diversification as more than just an avenue to mitigate individual corporate performance. Shocks to equity prices are a daily reality, no matter what the catalyst. While capital markets do operate with a herd mentality on a short-term basis, the longer run is about underlying fundamentals.

If this stock market experiences a material price correction—which is overdue—it will be a healthy development for the longer-term trend. But geopolitical shocks (like currency wars) are unpredictable, and they cannot be reckoned with.

I repeat my view that there is not a lot of action to take in this market as a new buyer. A portfolio of dividend paying stocks has a great deal of event risk, but the outlook for increasing dividend payments among blue chips is excellent in a low interest rate environment.

So far this year, it’s been a rocky road for stocks, and it’s looking like it will continue to be this way as geopolitical events are now the near-term catalyst. This market remains a hold for equity investors, especially those in dividend paying stocks.

Disclosure: None

Source: Should Your Portfolio Strategy Focus On Geopolitical Events?