We all take risks every day. Eating, walking, and even getting out of bed seem fairly harmless, yet they’re precarious enough to be measured by the U.S. National Safety Council.
This kind of information is valuable because it helps us to know what and where the risks are so we can mitigate them. And this isn’t just true in your day-to-day life; it also applies to your investment portfolio. Indeed, there are a lot of myths and misconceptions about risk. Here are some of the biggest culprits and how we can help protect you and your investments from them.
Myth: Risk tolerance is what drives asset allocation
Mitigating risk plays an important role in the investment selection process, but it’s just one of many factors. Your time horizon and objectives must also be taken into consideration.
In addition, while a single investment might be risky on its own, it might be perfectly acceptable in the context of a sensible, strategically managed portfolio.
Myth: Your approach to risk will not change over the years
As your goals and time horizon change, so too will your risk tolerance. One of our objectives is to ensure these gradual changes are always reflected in your portfolio.
If you’re 25 years away from retirement, for example, your investment options are virtually unlimited. Bring on the stocks and bonds from the emerging markets, commodities, tech start-ups and currency plays. As long as these securities fit with your overall objectives, you have time to ride out temporary fluctuations in value.
As you get closer to retirement, on the other hand, you will probably want to reduce some of those equity holdings while bulking up on securities with less volatility and more income potential. In other words, your portfolio will gradually shift toward securities with the potential to pay dividends or provide an income stream.
Myth: Once bitten, twice shy
If you had an underperforming investment or one that failed to meet your expectations, it’s important not to let that experience prevent you from considering a similar investment going forward. Just because an investment was lacklustre 10 years ago doesn’t necessarily make it so today. We want to be careful that a negative experience doesn’t stop you from considering investments that can help you reach your objectives.
Myth: Men are more likely to take risks than women
While there may be some truth to this, it typically stems from bravado, not gender. In managing a portfolio for the long term, we need to look well beyond biology, intuition, or swagger to the underlying fundamentals of what you’re trying to achieve.
In the case of couples, it’s essential to consider the perspective of both parties. If one partner is keen on China and resources while the other wants to stick with blue-chip equities, you can count on us to seek out investments that work for both.
Larry Kleinmintz, R.H.U., T.O.T., M.D.R.T.
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