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Managing Risk
"If you don't know who you are, Wall Street is an expensive place to find out."
- Adam Smith
Every investor dreams of maximizing their investment return while at the same time minimizing their risk. Unfortunately, we live in a world where these are not simultaneously available.
Risk management is a core concept often overlooked in financial management. We conduct a thorough overview of our client's risk - both business and personal - exposures as part of our overall investment recommendations.
Higher potential investment returns are invariably associated with higher assumed risk. Determining the long-term return a client needs to meet their goals is just one part of the equation. An investor's level of comfort with volatility, and the occasional loss that investment markets will deliver, is the other critical part.
We help our clients discover their answers to these three critical questions:
- What is my investment time horizon? "Will I need to liquidate a significant portion of my portfolio over the next five years or less, or can I leave the principal invested for the longer-term?" Many of today's retired investors require income or distributed capital. However, they may not fully appreciate that they also have a long-term investment horizon, as their retirement funds must last them 10 years, 20 years, or longer.
- How much investment risk can I afford to take? The process of deciding how much risk you should take to meet your goals is more complicated than many realize. Many investment professionals, having determined the maximum risk level an investor is willing to take, proceed to direct the client to assume that maximum risk level. This is in the belief that most clients wish to maximize return, and that more risk equates to more return. We, on the other hand, like to determine the least amount of risk the client must take in order to meet his or her goals, and then manage within that risk parameter. We believe that clients are better served by not risking more loss than they can afford.
- What is my psychological tolerance for investment risk? "Could I sleep comfortably through a 5%, 10%, 20% or 30% overall decline in my portfolio in any one year and still be free from anxiety?" For many, a growth-oriented approach, even if advisable, may not pass the "sleep test." While you may have a long-time horizon or plenty of capital, you may not be able to psychologically tolerate short-term volatility. The real issue is not your sleep, but whether your psychological intolerance for losses will cause you to insist on selling investments at an inopportune time and miss the inevitable rebound.
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