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.