Avoiding risk is a very difficult goal to have when investing in ASX shares – but one that has increased in importance in this era of record low interest rates. After all, there's not too many other asset classes that offer substantial rates of return these days (aside from perhaps property).
But as we all know, the share market is a volatile place – and one that doesn't guarantee the safety of capital in the slightest.
This doesn't matter so much for anyone investing with a long-term mindset. Investing guru Benjamin Graham once said that 'in the short run, the market is a voting machine but in the long run, it is a weighing machine' – an observation that this writer subscribes to.
But this mindset can't be employed with the same conviction if you're a retiree or a more conservative investor.
So what other ways are there to manage risk?
You could always stick with the dividend-paying blue-chips like Woolworths Group Ltd (ASX: WOW) and Transurban Group (ASX: TCL). But as Westpac Banking Corp (ASX: WBC) has recently shown investors, even this strategy can go wrong.
Another way you can try and hedge your risk with ASX shares is through 'pairing stocks'. Some companies are affected by macroeconomic trends, which can have a deleterious effect on a company's share price.
Take Qantas Airways Ltd (ASX: QAN). QAN shares are soaring this week, but one of Qantas' largest costs is jet fuel. If oil prices rise, it directly damages Qantas' bottom line and would probably lead to a fall in the company's share price.
But say you had an oil play like Woodside Petroleum Ltd (ASX: WPL) in your portfolio as well. As an oil producer, its likely that WPL shares would appreciate on the back of a rising crude price. If you held both stocks in your portfolio, it's my view that this 'pairing' would take a lot of risk out of the equation.
You could use the same logic with Rio Tinto Limited (ASX: RIO) and BlueScope Steel Limited (ASX: BSL).
Or even Afterpay Ltd (ASX: APT) and Commonwealth Bank of Australia (ASX: CBA) – more people using Afterpay means less people using CBA credit cards (although that one is a little more complicated).
Foolish takeaway
I'm not advocating going in guns blazing on this strategy, but I think it's still a useful tool in evaluating the risks of your own portfolio and where any threats to its capital might come from. There is nothing wrong with having a bet each way on the stock market – in fact, many successful investors do.
