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| Adrian Mastracci, president
of 'fee-only' KCM Wealth Management, says "There
is one ultimate test to determine the comfort
with portfolio risks. It is whether the investor
lies awake at night wondering about the investments." |
For Immediate Release
Vancouver, BC (May 13,
2003): Adrian Mastracci,
investment counsel & president
of Vancouver's “fee-only” KCM
Wealth Management, comments on understanding and containing
three investment risks.
The art and science of accumulating investments
has always involved incurring various degrees
of risk. No doubt, portfolio statements of
the last three years serve as reminders for
investors who own stocks and funds.
The measurement of risk is relative. Investors
can have different personal experiences with
the same risk factors.
Every investor ought to understand the types
of risks to which the investment portfolio
is exposed. Furthermore, every investor is
well advised to understand the levels of risks
that can be tolerated.
There are many types of risks that a portfolio
may incur, knowingly and otherwise. I would
like to focus attention on three major investment
risks.
I summarize them as:
1. Ability
The ability to take the risks
is associated with the investment time horizon.
Someone starting
out has more time to recover from setbacks
than someone heading into retirement.
2. Willingness
The willingness to take the
risks is associated with the investor profile.
A conservative investor
has far less inclination to incur capital fluctuations
then an aggressive investor.
3. Need
The need to take risks is associated
with the investment rate of return required
to achieve
those personal goals. The risks of seeking
a 6% return are different than seeking 10%.
The ability, willingness and need to incur
investment risks should always be established
at the outset. Investors who seek professional
counsel know it as part of getting to “know
your client”.
Investors aim to manage investment risks.
Containing the impact of risks means having
to implement investment strategies suitable
for each case.
While there are many choices, these are three
effective investment strategies for containing
risks:
1. Losses
Making portfolio selections is
not about always being right. Part of investing
is about coming
to grips with the prospects of being wrong.
What hurts portfolios the most is not incurring
losses. Rather, it is keeping them far too
long.
The solutions can be simple. Such as adopting
a personal selling strategy if the price drops
25% below the purchase price.
2. Diversification
Diversification involves
spreading the investment bets across different
investment selections.
Portfolios ought to contain a variety of asset
classes that do not all move in the same direction.
Look upon diversification as a welcome and
prudent safeguard. Investors do not want problems
arising in any one investment to ruin their
well-crafted portfolios.
A diversified portfolio reduces investment
risk. If one investment is suffering, the others
should help cushion the rest of the portfolio.
3. Rebalancing
Rebalancing involves periodic
tweaks to bring the portfolio back into line.
Usually with
the appropriate targets and asset mix set within
the investment game plan.
The allocations and weights of the portfolio
selections will drift over time due to market
forces. That drift can become significant,
perhaps also affecting the investment profile.
Consider lightening up on the outperformers
the next time the portfolio is rebalanced.
The other key is buying more of the underperformers.
Oddly enough, many investors choose the exact
opposite. Such as those who have jumped from
stocks to bonds in a major way.
There is one ultimate test to determine the
comfort with portfolio risks. It is whether
the investor lies awake at night wondering
about the investments. Such anxiety is surely
not worth the potential rewards.
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