Atlantic Capital Management

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Wednesday, 24 July 2013 00:00

The 4 “Rs” of Low-Risk Investing

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Last month I talked about assessing your need for life insurance to protect your family. This month I want to examine the basic elements of investing. Despite how the “big guys” of financial services industry might like to otherwise portray it, all forms of investment involve an element of risk. Even with the current availability of huge volumes of free research and opinion, managing risk in an investment portfolio is something that many people who take a “DIY” (do-it-yourself) approach struggle with. Understanding the core strategies for developing a low-risk investment portfolio is critical, and can mean the difference between ensuring your family’s financial future or losing most (or all!) of the money you’ve worked so hard for. We call these strategies the 4 “Rs” of Low-Risk Investing, and we present them for you briefly below.

Risk Tolerance: Perhaps no concept is more important to a low-risk portfolio than that of risk tolerance. Clearly defining and understanding your personal tolerance for the risk involved in the investment products you choose is absolutely crucial to a DIY scenario. Are you comfortable with high-risk products like sector-based equities and index funds, or do you want safer but slower-growth products like Treasury Bills and bonds? Determining the right mix of products that meet your personal risk-management strategy is the very first place you should start.

Research: Once you’ve determined your risk tolerance, it’s time to do the research you’ll need to both quantify and adjust your risk-management strategy. You’ll find no shortage of free research on the Internet, but beware: not all research is good research, and some of it is downright horrible! Cross-check opinions and advice from various sources. Don’t rely solely on ratings, performance snapshots, or benchmarks. In our opinion, focusing heavily on “outperformance” gets a lot of people in trouble! Do your due diligence with your risk-tolerance profile firmly in mind.

Realism: It’s important to be realistic about your investment goals, and to build and manage a portfolio that matches them as closely as possible. For example, if you’re in your 20s or 30s, you might have higher risk tolerance for your retirement portfolio than for the investment strategies you need to put your kids through college. Ask yourself “Realistically, given my current and anticipated future circumstances, what can I expect from my portfolio over the next 5, 10, 20 or more years?” Make decisions about the mix and relative risk of investment products from there.

Right-Sizing: Be judicious about how to fund your portfolio. We’ve all heard the stories about people pouring their money into shaky investments, or day-trading it away. Unfortunately, those stories happen all the time. Take the time to think hard about your present and future liquidity, and how that liquidity can be applied to your investment strategy. Benchmark constantly against your risk tolerance, and make adjustments as circumstances warrant.

William C. Newell, Certified Financial Planner (CFP), is president of Atlantic Capital Management, Inc. a registered investment advisor located in Holliston, Mass. With Wall Street access and main street values Atlantic Capital Management has been providing strategic financial planning and investment management for over 25 years.


Thursday, 27 June 2013 00:00

Why Is It Wise to Diversify?

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A varied portfolio is a hallmark of a savvy investor.

You may be amused by the efforts of some of your friends and neighbors as they try to “chase the return” in the stock market. We all seem to know a day trader or two: someone constantly hunting for the next hot stock, endlessly refreshing browser windows for breaking news and tips from assorted gurus.

Is that the path to making money in stocks? Some people have made money that way, but most do not. Many people eventually tire of the stress involved, and come to regret the emotional decisions that a) invite financial losses, b) stifle the potential for long-term gains.

We all want a terrific ROI, but risk management matters just as much in investing, perhaps more. That is why diversification is so important. There are two great reasons to invest across a range of asset classes (stocks, bonds, real estate, commodities, currency), even when some are clearly outperforming others.

#1: You have the potential to capture gains in different market climates. Think of different asset classes as different markets. If you allocate your invested assets across the breadth of asset classes, you will at least have some percentage of your portfolio assigned to the market's best-performing sectors on any given trading day. If your portfolio is too heavily weighted in one asset class, worse yet, in one stock, its return is riding too heavily on its performance.

So is diversification just a synonym for playing not to lose? No. It isn’t about timidity, but the wisdom of risk management. While thoughtful diversification doesn’t let you “put it all on black” when shares in a particular sector or asset class soar, it guards against the associated risk of doing so. This leads directly to reason number two...

#2: You are in a position to suffer less financial pain if stocks tank. If you have a lot of money in growth stocks, either individual stocks or funds (and some people do), what happens to your portfolio in a correction or a bear market? You’ve got a bunch of losers on your hands. Tax loss harvesting can ease the pain only so much.

Diversification gives your portfolio a kind of “buffer” against market volatility and draw downs. Without it, your exposure to risk is magnified.

What impact can diversification have on your return? Let’s refer to the infamous “lost decade” for stocks, or more specifically, the performance of the S&P 500 during the 2000s. As a USA TODAY article notes, the S&P’s annual return was averaging only +1.4% between January 1, 2001 and Nov. 30, 2011. Yet an investor with a diversified portfolio allocating a 40% weighting in bonds would have realized a +5.7% average annual return during that stretch.1

If a 5.7% annual gain doesn’t sound that hot, consider the alternatives. As T. Rowe Price vice president Stuart Ritter noted in the USA TODAY piece, an investor who bought the hottest stocks of 2007 would have lost more than 60% on his or her investment in the 2008 market crash. Investments indexed to the S&P 500 sank 37% in the same time frame.1

Asset management styles can also influence portfolio performance. Passive asset management and active (or tactical) asset management both have their virtues. In the wake of the stock market collapse of late 2008, many investors lost faith in passive asset management, but it still has fans. Other investors see merit in a “relative strength” style that is more responsive to shifting conditions on Wall Street, one that fine-tunes asset allocations in light of current valuation and economic factors with an eye toward exploiting the parts of market that are really performing well. However, the downside to active portfolio management is the cost; it can prove more expensive for the investor than traditional portfolio management.

Believe the cliché: don’t put all your eggs in one basket. Wall Street is hardly uneventful and the behavior of the market sometimes leaves even seasoned analysts scratching their heads. Without divine intervention or clairvoyance we can’t predict how the market will perform; we can diversify to address the challenges presented by its ups and downs.

William C. Newell, Certified Financial Planner (CFP), is president of Atlantic Capital Management, Inc. a registered investment advisor located in Holliston, Mass. With Wall Street access and main street values Atlantic Capital Management has been providing strategic financial planning and investment management for over 25 years.

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