Balancing Risk and Reward:
How do we go about building resiliency in portfolios? Traditional investments (stocks and bonds) may not fully capture your unique financial goals and risk tolerance. I believe we need to go beyond the one-size-fits-all model, taking into consideration someone’s individual circumstances, time horizon, and goals.
For example, rather than just looking at the risk tolerance of a particular individual to determine their portfolio, we may also consider someone’s career and where they work. For example, a Doctor may not want to have a large exposure of their investments in healthcare stocks because if the healthcare space goes through rough times, not only does that affect their investments, it could also affect their income.
Further, if they are a surgeon, they may want to be careful about investing a large portion of their net worth into their surgery center.
Same principle as above: their income and investments are tied to the same thing. The role of diversification is to have non-correlated assets so that when some of your investments are down, the other investments are potentially up.
Allocating your investments across a spectrum of assets such as stocks, bonds, and cash, is a good first step to mitigate the impact of market volatility while aiming for consistent, sustainable returns. The goal is to create a well-rounded portfolio that not only withstands market fluctuations but also thrives amidst varying economic times.
Exploring Alternative Investments: Opportunities Beyond Stocks, Bonds & Cash
While traditional investments serve as the foundation of a well-rounded investment portfolio, high net worth individuals potentially have an advantage of exploring alternative investments. These options present an opportunity to further diversify, potentially enhance returns, and reduce correlation with traditional markets. For example, alternative investments may include private equity and lending, hedge funds, real estate, venture capital, and commodities.
While there may be an opportunity for greater return, we should also take into consideration if the risk is worth taking on that chance for greater return. The way we look at alternative investments is not necessarily to achieve a greater rate of return but as a way to add an uncorrelated investment to the traditional asset classes. We have to be careful in our approach as some of these strategies may be unproven and have a shorter track record.
Tailoring to Your Risk Profile:
Each investor’s risk appetite and investment goals are unique. Before investing, one should do an in-depth assessment of your risk profile, financial objectives, and preferences before recommending specific alternative investments. This tailored approach ensures that your portfolio aligns with your personal goals while adhering to a risk management framework.
Conclusion:
Diversification goes beyond just asset allocation. It involves a process of selecting and combining various asset classes and alternative investments to create a resilient portfolio that reflects your unique financial situation and goals. By embracing a holistic approach to diversification, investors can potentially achieve a higher level of financial security and growth.
Disclaimers:
A diversified portfolio does not assure a profit or protect against loss in a declining market. Asset allocation is an investment strategy that will not guarantee a profit or protect you from loss. The return and principal value of stocks fluctuate with changes in market conditions. Shares when sold may be worth more or less than their original cost. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
