Risk, Rewards and Avoiding the See-Saw of the Markets

by Nick Giacoumakis | May 18, 2018

When investing your hard-earned golden eggs of your investment portfolio, it’s important to understand the relationship between risk, volatility and long-term reward. As a practicing wealth manager working with clients of all types, financial conditions and risk profiles for more than 25 years, I have worked to help my clients understand the relationship between these three important factors, so they may have success in reaching their long-term investment goals.

First, provided that an investor is properly diversified across hundreds or even thousands of securities, taking advantage of a broad index type approach is important.  Far too often, investors look at short- term fluctuation as loss, and this is just not accurate. It is important for investors to understand that true risk has more to do with an investor’s time frame, rather than shorter-term volatility, or the See-Saw motion that a longer-term growth portfolio will experience.

The most important question an investor should ask themselves is when or if they need a portion of their investment returned to them. For the investor that has a goal that requires needing all or the majority of their investment back in a reasonably short period of time — say within two years to buy a home, property or any other large purchase — they need to consider timing. For this investor, significant fluctuation can equal a sizable risk if invested too aggressively, if, for example, the account needs to be liquidated when the markets are in a downturn or correction and the funds are needed. However, for the investor who may be retired or need annual income from their portfolio which they are relying upon for a prudent annual withdrawal in the 4% to 5% range, fluctuation caused by the same market downturn, correction or even bear market can be dealt with, without any irreparable long-term damage to the investor’s financial plan, through a properly diversified portfolio. Too often, short-term downturns as just mentioned rattle these investors and cause them to make decisions emotionally, such as selling equity investments when they are temporarily down near the bottom of a market cycle or in a bear market, which can hurt their long-term investment results.

As the stock markets in 2018 have become increasingly volatile with a back-and-forth see-saw motion, following a banner year in 2017, it is important for all investors to revisit their investment objectives, risk tolerance and, most importantly, time frames for when the investments will be needed. If investors understood the fundamentals of the concept of prudent systematic withdrawals on a long-term, properly diversified portfolio, there would be a lot less fear and anxiety experienced by the investing public. Taking this practical approach to being clear on whether your particular investment account or entire portfolio is needed for lifelong income or for a lump sum purchase will be critical so that you don’t get caught on the wrong side of the see-saw.

For more information, contact Nick Giacoumakis, President and Founder, NEIRG.