Being an “old hand” with many many years of experience, time always shows the ups and downs of investing. In the past 3 years we have seen both sides. Exuberance on the upside and fear on the downside. Since we are in downside mode these days, we thought it important to talk about risk management. More specifically, how do we handle and manage risk for our clients.
First and foremost, our core beliefs revolve around balance and diversification. We always strive to diversify our investments and not stray too far from a balanced allocation. Our record and history show we may not always be the top performing in raging bull markets but, and more importantly, we also aren’t the worst when the tide goes out. Staying in the middle will do that.
For our clients who are taking distributions from their money, volatility of a portfolio can be nerve wracking. A key point to remember is that we hold lots of cash to feed the clients withdrawal needs. We also hold lots of fixed income and liquid stuff to also feed the spending needs. On average, a typical retiree portfolio will hold some stocks for growth over time but equally important, will hold over 10 to 15 years of withdrawals in cash and fixed income. When it’s put in perspective, people have less concern with periodic volatility.
Next, another core belief we have is that financial planning should drive one’s investment portfolio. More importantly, in meeting one’s financial goals they should not take more risk than necessary to meet their long-term objectives. When the bull is running it is easy to slide into being aggressive and over loading on stocks (or other asset classes). That’s an easy mistake repeatedly done by the great unwashed masses. Keeping a goal-oriented focus stops the urge to drift into a risk tolerance that isn’t appropriate.
Next, when it comes to the investment part of your portfolio, we mostly utilize mutual funds and exchange traded funds. We avoid (with few exceptions) individual stocks or specific market sectors. Frankly, the potential risks outweigh the potential returns. In those cases where a client wants a specific stock, we limit exposure to a small percentage of the portfolio. With our mutual funds we tend to favor funds with long track records and seasoned/tenured management teams. Time and experience are important and 2022/2023 has reinforced that.
Next, and timelier today, with client cash we spread the money around. Utilizing more than one money market or bank deposit, and keeping them to FDIC insurance levels, mitigates risk. We also use treasury securities in portfolios with high cash balances to enhance return and take advantage of the Federal government’s explicit safety language.
Last, and certainly not least, we avoid fads and new age stuff. Not trashing crypto, SPACs, NFT’s, or other such things but they don’t fit our definition of an appropriate long term investment vehicle. Same with sectors or things that aren’t easily understandable. Forgive me if you disagree, but if you can’t explain an investment to me in 30 words or less, or on a cocktail napkin, I can’t subject someone’s “real money” to such things. Call me “old school”.
Finally, we favor liquidity and easy access. Some investments may offer decent returns, but you can’t get your money out quickly. That’s not something we want to use in our portfolios. Funds or partnerships that are only liquid on a monthly or quarterly basis mean you wait for your cash when it’s time to sell. Not a fan…
As always, thanks for listening and for allowing us to be a part of your financial life. We value the relationship and strive to earn your trust every day. If you want to talk further about this or any other subject, feel free to reach out. We can do a call, office meeting, or Zoom at any time. We work for you so don’t feel odd about contacting us at ANY time.
Ed, Frank, and Tammy
Edward Stiles
200 N Union St.
Kennett Square, PA 19348
cell 610-745-1931
Securities and Advisory Services offered through Commonwealth Financial Network®, member FINRA/ SIPC, a Registered Investment Adviser. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network
All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.
This material is intended for informational/educational purposes only and is theoretical. Strategies discussed are operational and process oriented and do not guarantee a positive outcome. Loss of investment principal and risk of loss is always present from investing. The data and theories discussed are notional to make a point. The details and conclusions are solely the opinion of the author. It should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investing entails risk of loss and no guarantees are implied or suggested. Please contact your financial professional for more information specific to your situation