In life, people tend to either be more risk adventurous or prefer to play it safe. Either way is great, but it’s important to realize how taking chances makes you feel — especially when it comes to your finances. When dealing with your money and investments, you need to make sure you feel comfortable with the decisions you’re making. Yes, often times the riskier the investment the bigger — and quicker — the reward, but that also means a larger chance that the it could go wrong.
But how do you know which path to take, high risk or low risk? I’ve already mentioned that it’s important to be comfortable with your investment decisions, but how do you make sure of that? That’s where your money manager comes in. You should meet with a few prospects to determine their philosophy — their policies and procedures for maximizing your returns and helping you achieve your financial goals. For example, when we select money or fund managers, we look for those who deliver good performance over the long term, have a below-average risk profile for their style of investing, and stay consistent in their investing approach. We believe that the most important considerations in selecting an investment advisor are their philosophy, approach, and methodology. These are the questions they should be able to answer: What kind of approach do they take to investing? How do they set about actually investing? And their answers should make you feel assured in their ability, as well as in listening to your goals and creating a plan that best fits your life and plan.
Our approach follows Modern Portfolio Theory (“MPT”). MPT was created by Harry Markowitz, a Nobel Prize-winning economist, in his paper “Portfolio Selection.” It is an investment theory based on the idea that risk-averse investors can create investment portfolios to optimize or maximize expected return based on a given level of market risk. It is one of the most important and influential economic theories dealing with finance and investment of its time.
This theory essentially says that it is possible to construct an optimal investment portfolio that offers the best possible expected return for a given level of risk. By investing in various asset classes like stocks and bonds, you can take advantage of diversification, which reduces the riskiness of the portfolio. You reduce risk by not putting all of your eggs in one investment “basket.” At the end of the day, your personal philosophy may be different; your advisor’s may, too, but at least make sure that they have one and you understand it and you’re comfortable with it.
For more tips on the right kind of investment risk, visit tswealth.com.