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| Adrian Mastracci, portfolio manager at KCM Wealth Management, says “The bigger reality is that many investors often incur more risks than they may realize." |
Vancouver, BC (May 30, 2007): I routinely ask investors what they want from their portfolios. Many say it’s the highest returns for the least risks.
Adrian Mastracci, fee-only portfolio manager at Vancouver based KCM Wealth Management comments, “It sure sounds very appealing. I quite like it too. Sadly, it remains a mere fantasy.”
A fantasy that still lives on and on. One in no particular peril of making the endangered list any time soon. You could say that it has plenty of believers.
Let me tell you a story. However, I caution that you have to be willing to cut through all the noise surrounding this topic. The devil is in the details.
The bigger reality is that many investors often incur more risks than they may realize. Their portfolios are typically far from those least risk levels that sound so desirable.
Scaling the Wall of Risks
One fundamental strategy of investing is to identify the investment profile comfortable to you. It ought to reflect risk levels you can live with. Remember that a large loss is devastating to portfolio health.
Establishing investment profiles is both an “art and a science”. Personal risk tolerances have much to do with them. Here is my overview of six profiles for today’s investment environment:
| Investment Profile |
Typical Asset Mix Targets |
Likely Target
Age Group |
Investment
Return Targets |
| Equity |
Fixed Income |
| Preservation |
15% |
85% |
65 Plus |
Up to 5% |
| Income |
35% |
65% |
60 Plus |
5% to 7% |
| Balanced |
50% |
50% |
50 to 85 |
6% to 8% |
| Growth |
60% |
40% |
35 to 75 |
7% to 10% |
| Aggressive |
80% |
20% |
Up to 55 |
Over 10% |
| Speculative |
95% |
5% |
Up to 45 |
Over 20% |
A range of targets exists within each profile. For example, a “preservation” investor may not be comfortable with any equity. Conversely, a “speculative” investor may not want any fixed income.
It’s interesting to note that both the “preservation” and “speculative” profiles can be dangerous for the long-term. One for adverse effects of inflation and taxes. The other for high levels of investment risks.
Let’s be very clear. At the end of the day, it’s the risk component that delivers returns. A direct connection usually exists between levels of risk incurred and potential returns.
Investors who truly aim at incurring the least risks also aim at least returns. Going for the gusto means incurring a healthy dose of risk. Knowing one’s comfort on the wall of risks helps keep them in check.
Getting it Right
There is a right way and a wrong way to invest. Wise investors always care about the implications of incurring risk. Regrettably, novice investors still shop for performance till they drop.
Prudent investors consider risks first, returns second. Risks will eventually catch up to investors who focus on performance. Returns will eventually reward investors who focus on investment risks.
Concentrate on what your nest egg is to provide in the long run. Estimate the portfolio size required and the rate of return to get you there. This is your portfolio yardstick. Not what markets have done.
Asset mix has the biggest impact on portfolios. Choosing a sensible mix so that the investments don't all move in the same direction reduces portfolio risk.
A positive mindset is best for making long-term portfolio decisions. Dwelling on the past is counter productive. Focusing on the future gets the job done.
Testing Comfort
One test provides indications on the suitability of the current portfolio. I call it the “Pillow Comfort” test. If your nest egg causes you to worry, it’s time to rethink your investment strategy.
My sage advice. Forget fantasizing about the mythical highest returns with least risks. Rather, make sure that the risk levels incurred and potential returns both fit well within your comfort zone.
Always be aware and be in control of your investment risks. No more fantasies, please.
Once you get the risk part right, it’s smoother sailing toward your investment destination.
That’s it. You’ve now cut through the noise. End of story.
Your comments are welcome. I am available for a discussion.
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