– In this day and age of “robo-advisors” and passive index investing, many
investors seem to have forgotten the single immutable truth that equity
markets are inherently risky. That’s simply because the share prices of
stocks traded on markets are influenced mostly by expectations of future
earnings growth. Many factors can come to bear on these expectations apart
from a company’s competitive position, financial strength, and industry
outlook. These include shorter-term geopolitical events (not as important)
and longer-term economic and monetary policies (more important). Put it all
together and it adds up to market-wide trends, oscillations, and
fluctuations, which are often characterized by a wide amplitude from top to
bottom. And no one knows when the market will turn, or for how long. This
is what’s broadly called “risk.” And it’s what most investors have trouble
Many investors, particularly novice investors, have a wildly inflated sense
of their tolerance for risk. I’m often asked why not allocate 100% to
stocks when markets are making new highs? I’ve lost count of the number of
times I’ve heard the phrase, “I can live with the risk.” But can you
really? A high net worth portfolio of, say $500,000, invested in a broad
equity index ETF would plunge by $60,000 if the market sustains a 12%
correction. Your portfolio would have to climb 13.6% just to get back to
breakeven – a climb that usually takes much longer than the initial drop.
Could you really live with that kind of fluctuation – especially if you’ve
never experienced it before?
The key to dealing with risk is to ensure that your investment portfolio
aligns with your tolerance for risk. With moderate risk-tolerance, for
example, you might weight your portfolio 60% equity and 40% fixed income.
The equity component is there to generate longer-term growth (and perhaps
some dividend income); the fixed-income allocation is for safety and
Remember that when you create an investment strategy, you’re doing it with
the objective of increasing your wealth. But you want to do that while
staying in your risk comfort zone.
So if you’ve decided, say, that you are a more defensive, low-risk
investor, but you still like the idea of some growth, then you might settle
on a broadly diversified asset mix of perhaps 10% cash, 50% fixed-income,
and 40% conservative dividend-paying stocks.
That sort of portfolio allocation will serve you well, but you have to
maintain the discipline to stay with it. Your equities will fluctuate more
than your fixed-income and cash. But that’s the point: Your fixed-income
bonds and dividend-payers are designed as a kind of built-in risk-reduction
function, so your overall portfolio won’t suffer as much in those
inevitable market downturns.
But whatever strategy you’ve decided upon at the outset, you have to stick
to it to make it work. The discipline lies in making sure you don’t re-set
your portfolio at every turn of the market or every piece of hysterical
hype emanating from social media – because you’ll almost certainly do it at
the wrong time.
Investing takes knowledge and patience. Know your own risk tolerance and be
realistic about it. Stay educated and make decisions only when you have
weighed the pros and cons and are ready to be accountable for the outcome.
If you are not sure you are holding the right asset mix, or are uncertain
about your true tolerance for risk, consult a
qualified financial advisor,
who can meet with you personally and who is equipped to help you with
precisely those problems.
Robyn Thompson, CFP, CIM, FCSI, is the founder of
Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management
for high net worth individuals and families. She is also listed as a
MoneySense Approved Financial Advisor. Contact her directly by phone at 416-828-7159, or by email at
for a confidential planning consultation.
Notes and Disclaimer
© 2018 by the Fund Library. All rights reserved. Reproduction in whole or
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The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned are illustrative only and carry risk of
loss. No guarantee of investment performance is made or implied. It is not
intended to provide specific personalized advice including, without
limitation, investment, financial, legal, accounting or tax advice. Please
contact the author to discuss your particular circumstances.