By Payel Farasat, Chief Investment Officer, Loring Ward
Look up the word RISK in a thesaurus and you see words like danger and hazard, but also opportunity and fortune.
For investors, this double meaning of risk sits at the very heart of your portfolio. Risk is the price of admission you pay to invest in the potential of the stock market. The possibility of losing money is precisely where the potential to grow your portfolio comes from. Simply put, you can’t get return without risk. “Nothing ventured, nothing gained” as the old saying goes.
The more “smart” risks you take in your portfolio, the greater your potential returns. The opposite is also true: When you don’t take enough risks, or, take unnecessary risks in your portfolio, your potential returns are lower.
We seek to manage risk through our prudent Asset Class Investing approach. Here’s how:
Diversify globally. Almost half of the world stock market value is outside of the U.S.
We think of the U.S. as a world leader, but over the past several decades, America’s stock returns haven’t ranked even in the top 10 in terms of annualized performance of countries around the world. The average U.S. investor has a portfolio made up of about 75% U.S. stocks. While that may seem like the patriotic thing to do, it can also mean missing out on a world of opportunity.
Invest in thousands of securities to help reduce concentration/company-specific risk
If you own a lot of companies in a variety of industries in countries around the world, the impact on your portfolio is less significant if any one company or sector experiences losses.
Combine Asset Classes that respond differently to various market conditions.
While small company stocks tend to outperform large company stocks over time, there can be periods when large companies outperform. The same is true of bonds versus stocks and growth versus value stocks. Sometimes, international market returns beat the U.S. markets; other times, the U.S. is ahead. Trying to predict which sector or country or asset class will outperform or underperform is something very few money managers can do consistently. And, the costs of their mistakes can have a real impact on your portfolio in the form of higher transaction costs, higher taxes and poorly-guessed market moves. Instead of trying to outguess the market, we prefer to let the long-term growth potential of global markets work for you with portfolios that include 9 asset classes representing up to 10,000 securities in 45 countries and 35 currencies.
Invest in high-quality, short-term bonds in an effort to help smooth out dramatic ups and downs in your portfolio and to provide you income in certain interest rate environments.
Higher yields are available by investing in bonds with longer maturity and lower credit quality, but at the cost of increased portfolio volatility. This is why we believe that most investors are better compensated by allocating their risk budget towards stocks and staying more conservative with their bond allocations. We believe that a lower risk profile in bonds allows investors to take slightly more risk with their stock portfolio while maintaining liquidity.
Over time, stock markets (representing the great companies around the world) have tended to reward patient, strategic investors. However, the price for these long-term gains can involve living through periods of decline. In partnership with your financial advisor, we focus on managing risk in your portfolio to help improve your overall experience as an investor through both up and down markets.
Diversification neither assures a profit nor guarantees against loss in a declining market. All investing involves risk. Principal loss is possible.