Manage the Risk
Here is a hypothetical story of a stock owned by a successful business man, a seasoned investor. We will call him Paul. This was a stock with opportunity for growth- the boys on Wall Street loved it and it had been on a "tear," showing no sign of stopping. Paul excitedly buys a large portion in his portfolio expecting the stock to continue its trajectory "to the moon." All goes as planned; he is up 15% in a few weeks... Then it happens. The unthinkable- his stock goes down and down and down again. The once "sure" stock selection is now down 40%. Not so exciting now.... What if Paul said "ok no problem, I only need it to go up 40% to break-even!"
Do you believe him?
Well if you do- that is okay, many people do at first glance. Here is the reality: Gaining 40% won't get him back to even.... The gain needed is +66.67% (FYI- if the loss is 50%, you need +100%)! This is the power of percentages. We have all been there at one time in our lives. This story exposes the necessity to manage risk.
Anyone Can Pick Investments, Few Can Manage Investments
The professional planning around investments requires considering the big picture: your goals, time horizon, true diversification, estate plans, taxes, the current economic outlook and most importantly the real acceptable risk to you. Many people acknowledge risk, "sure it can go down"... however most never accept risk, "I can afford to lose $xxx." Risk is real. It is necessary. And risk is okay, when the framework of investment management focuses on it.
Benjamin Graham, considered the father of value investing wrote,
"The essence of investment management is the management of risks, not the management of returns."
- Use the big picture- your financial plan to select and manage your holdings Don't commit a large percentage to a single investment holding, diversify Use stop losses (an order to sell at a certain price that helps manage a holding in the case of a price decline) Don't marry yourself to an idea or stock
In the current market environment with the Indexes hitting all-time highs, now is the time to know what risk is acceptable to you and preserve accordingly. We've seen great growth the last several years, but you need to manage the risk in your portfolio. Yes, the market may continue to grind higher but what if it doesn't? Is your true acceptable risk alright with you? Make sure your primary goals are achieved. Is your goal capital preservation, income generation, or long term growth for retirement? Seek professional and appropriate advice to have your portfolio evaluated and find your acceptable risk.... You can often hear me say, "If you appropriately manage the risks the returns will take care of themselves."
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Luke Fields and not necessarily those of RJFS or Raymond James. Past performance may not be indicative of future results. The example provided is intended to be a hypothetical illustration only, and does not represent any investor account or experience. Individual results may vary; Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification. You should discuss any tax or legal matters with the appropriate professional.
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Luke Fields is Vice President of Foley & Foley Wealth Strategies, An Independent Firm, that has been based in Worthington, Ohio since 1981. A graduate from The Max M. Fisher College of Business at The Ohio State University, Luke is a CERTIFIED FINANCIAL PLANNER™, holding his Series 7, 66 and Ohio Life, Health and Variable Annuity Insurance licenses. He resides in Columbus, OH with his high school sweetheart, Beth and their three children. Luke is an active member of his church, serving in leadership and finances.
Follow additional insights and connect on LinkedIn, Facebook, his blog or Twitter. You can always reach him with comments or questions at: luke.fields@raymondjames.com.
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