Safety and Return

In many initial client meetings (and sometimes beyond the initial meeting), clients are often in search of a unicorn, an investment that provides a high rate of return without any risk. Most people won’t explicitly say that, although we do often laugh about one particular prospect that wanted to “only own the stocks that go up!” Yeah, us too!

If you are reading this blog post, you likely understand that investing in anything brings some level of risk. Even leaving your money in a bank account means you are taking on interest rate risk; you aren’t earning enough on your money to keep up with inflation (that’s especially true today). It is a hard concept to grasp in real terms, because you don’t see your principal go down in value and therefore feel “safe.”

For most investors, comfort or discomfort with the amount of potential loss in a particular portfolio is the area that receives the most attention. In fact, one of our onboarding forms is a risk tolerance questionnaire that asks some what-if questions regarding behavior when an investment loses value. Do you a) sell everything b) do nothing or c) add more money at a low point? We get more specific depending on the situation, but your reaction to losses can be a key indicator in creating an appropriate investment mix.

The closest thing you can get to a best-of-both worlds (return without much risk) scenario may be a balanced portfolio. Simply put, this is investing half of your money in stocks (risky) and the other half in bonds (conservative). As you can see from the chart below, the balanced portfolio still experiences losses, but not nearly as much as an all-stock portfolio. And, the balanced mix experienced a very respectable return over the last 20 years when compared to the all-stock allocation.

 A Balanced Portfolio Can Help Balance Out Volatility


As Sarah Irving discussed in her Keep Calm and Carry On blog, if you are patient enough, you will see your stock portfolio recover from declines and experience potentially high returns. However, adding bonds to the mix will cushion those heartburn moments (technical term to Google: downside capture ratio), while still allowing you to experience most of the return when the stock market goes back up (technical term to Google: upside capture ratio).

Speaking of mitigating risk, we recently had our dog Rosie spayed in order to avoid more new dogs! She recovered amazingly well and to no one’s surprise acts as if nothing ever happened. However, in order to reduce the risk of infection and/or her licking the affected area, we forced her to wear this not-so-flattering donut.

A black dog with a blue collar sitting on a car seat

“This seems a bit too conservative for me”


Blog Disclosure

Categories : Financial Planning

Leave a Reply

Your email address will not be published. Required fields are marked *