Stick to Singles and Doubles

Marc Zabicki:

In recent editions of LPL Street View, we've talked quite a bit about market risk and some specific uncertainties as it relates to politics and global military conflict. In this latest edition, we want to take a broader look at the subject of risk. After all, as investors, the way we go about managing risk may make a bigger impact on wealth-building than our investment selections themselves. Let me explain. For many of us, the concept of compounding returns will be the primary driver toward reaching our retirement goals, meaning a stable portfolio asset base. One that does not suffer from wild swings in portfolio value is typically a sounder foundation on which to compound returns from the stock and bond market. Said another way, focusing on hitting consistent singles and doubles rather than swinging for the fences, can help protect the portfolio base on which stock and bond returns can be compounded.

Marc Zabicki:

Clearly reducing the risk of portfolio loss can have a material effect on wealth-building. In investing, there are always uncertainties and always risks to manage as we build investment portfolios. Based on the visibility into the market and the potential variation in market outcomes, we may feel comfortable in dialing up or dialing down risk accordingly. But we should always take into account the probability that our investment decisions could be wrong when we decide to put the money to work. Let's use the current situation to explain this a bit further. Take the U.S. presidential election for instance. It creates an uncertain situation for markets as investors are left increasingly unsure of policy outcomes, given that those outcomes could be influenced by the election winner. And this election looks to be pretty close. So visibility into investment direction is not very clear. So how do we think about portfolio risk management when investment direction is particularly unclear?

Marc Zabicki:

Do we dial the risk up or do we dial it down? The answer is we dial it down. Think about it this way. When it's foggy outside and you have less visibility, do you drive faster or slower? When visibility into potential investment outcomes is increasingly impaired, a sound process suggests that you should take less risk. You drive slower because you can't see very clearly ahead of you. If you are applying a good risk management approach to investing and you are applying it consistently, and we certainly hope you are, then knowing when to take risk is as important as the amount of risk you take. This, we believe, allows for a sounder portfolio foundation on which we can compound returns over time. Thanks for listening, and as always, allocate wisely.