Change a few words around in this old nursery rhyme to include the word RISK. Should Mr. Woodchuck take as much risk as he could if he could chuck…..well, you get the point.
The reality is, with a little liquid capital on hand, anyone could dive headfirst into a risky investment because the payoff potential is substantial at the other end. The problem is, not all risks pay off. We have all taken both calculated and uncalculated risks before, from jumping off that swing set (broken arm anyone?) to starting a business from scratch.
Each comes with its own set of possible outcomes and it is up to you to assess whether the risk is worth taking. The wider the spectrum of outcomes, the more calculation required. The more important the ultimate outcome, the greater the hedge against negative outcomes should be.
That brings me to my point today. As an investment professional, it is extremely important that I understand what my clients ultimately need to achieve, so I can manage their investments accordingly. Sure, the TSX and the DOW matter, but your personal targets (call it The Index of Me) matter more. It may be nice to have an annual return outcome in the mid-teens (hello? last year anyone), but the risk associated with that potential outcome is simply to great, in almost all, if not every case I am presented with.
Your FINANCIAL PLAN will dictate how your investment portfolio is built, and how it should be managed on an ongoing basis. If you only need 6%, why chase 12. There will be years like last year, and years like 2008 (and everything in between), but if we are doing things correctly and respecting the stated goals, then the proper hedge is already on and your portfolio will be properly positioned to absorb the potential shock of a downturn.
The alternative is to simply dive in and invest blindly. Then perhaps another nursery rhyme would apply ........ Three Blind Mice........
Have a great day.
For another take on this, click here to see a post from Josh Brown. It inspired me to chime in on this subject.