Success in investing is often determined not just by potential gains but by how well you manage and mitigate risks. All investments carry a certain degree of uncertainty, and understanding these risks is essential for building a resilient portfolio.
At HighPoint Advisors, LLC, we aim to help clients in Syracuse, central New York, and other markets make informed decisions about their investment strategies. Here, we’ll explore the various aspects of assessing risks in your investment strategy, identifying when to play it safe, and when to adopt a more aggressive approach while safeguarding your investments.
A good starting point is to determine your risk tolerance. It reflects your ability and willingness to withstand potential losses. It’s important to consider both the financial repercussions of investment losses, as well as the psychological impact. If your portfolio goes down a lot, will you be able to sleep at night?
The next step would be to identify your time horizon and investment goals. Are you investing as part of your retirement planning for many years down the road, or are you targeting a short-term objective of buying a new car? Those two objectives call for vastly different investment portfolios, as well as different management of the respective portfolios.
What Are Some of the Risks of Investing?
- Market Risk: The potential for losses due to market fluctuations.
- Credit Risk: The possibility of a borrower (or issuer of a bond) defaulting on their debt obligation, thus not repaying the loan to the investor.
- Inflation Risk: The erosion of purchasing power over time due to inflation can reduce the real returns on your investments.
- Interest Rate Risk: Changes in various interest rates can affect the value of many types of investments. For example, when interest rates rise, bond prices fall, and vice versa.
- Liquidity Risk: The inability to sell an asset quickly without a significant price discount.
Playing It Safe vs. Being Aggressive
Naturally, there is no one-size-fits-all approach to investing. On one end of the spectrum, investors with a low risk tolerance, short time horizon, or a specific near-term financial goal may be better suited for a more conservative strategy, which might focus on capital preservation. Possible investment candidates to consider could be low-risk assets such as government bonds, high-quality dividend-paying stocks, or money market funds. Seeking stability over high returns may better serve these investors.
On the other end of the spectrum would be those with a much higher risk tolerance, as well as younger investors with a long time horizon. These individuals can afford to be more aggressive, taking on more risk in pursuit of higher returns over time. Investments they may consider would include growth-oriented stocks, emerging markets, or alternative asset classes. But keep in mind that leaning more aggressive doesn’t mean being reckless. Investors should aim to align their goals with their risk tolerance.
Preserving Your Investment Portfolio
- Asset Allocation: Dividing your investments among different assets, such as stocks, bonds, or cash alternatives.
- Diversification: Spreading investments across various industries, security types, sectors, and geographic regions can reduce the impact of any single investment’s performance on your portfolio.
- Rebalancing: Regularly realigning your portfolio to maintain your desired asset allocation can also help manage risk over time.
- Risk management tools: Depending on your situation, it could be appropriate to use different order types, or alternative investments designed to hedge parts of the markets.
Events That Impact a Portfolio
Markets move up and down based on many forces. Being aware of market conditions and being prepared to adjust your investment strategy when needed can help mitigate potential losses during turbulent times. This may sound like a daunting task but seeking help from a qualified financial advisor can solve that problem.
While financial advisors cannot eliminate all portfolio risks, they can help navigate the various events that bring volatility into the markets. Such events can include economic recessions, natural disasters, industry-specific disruptions, geopolitical tensions, or technology changes. One thing that history teaches is that change is constant, and successful investment strategies should be built to adapt to that reality over time.
Some Questions Our Clients Ask Us
How Can I Determine My Risk Tolerance?
How Often Should I Review My Investment Strategy?
Should I Be More Aggressive When the Markets Are Down?
Is It Smart to Buy Individual Stocks?
Create a Sound Investment Strategy With HighPoint Advisors, LLC
We’ve outlined many factors and considerations that go into a successful investment strategy, but there is no perfect formula to create the ultimate market-beating portfolio. At HighPoint Advisors, LLC, our advisors work directly with our diverse clients to understand what they need and how best to work toward their goals. Risk management is part of the foundation of the portfolios that we craft for our clients. Working to reduce potential negative performance over time helps our clients in Syracuse, central New York, and beyond stay on track as they seek to reach their goals.
Contact us today to see how we can help you enhance your investment strategies.
Investing includes risks, including fluctuating prices and loss of principal. No strategy assures success or protects against loss.
Asset allocation does not ensure a profit or protect against a loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss