Diversification and Risk Tolerance and Bear Markets….OH MY!

7 Aug    Uncategorized

Preparing for the next ‘Crash’ by re-examining 2008

In the classic film ‘The Wizard of Oz’, Dorothy and her friends traveled to the glittering city of Oz in search of the Wizard who could grant their wishes. He promised he could if they took a risk and, upon determining they were not risk averse to reach their goals, they took the chance and came out on the other end OK.

If you have spoken to the financial wizard who is your portfolio manager then the word ‘diversification’ has probably become as ubiquitous as the word risk when discussing your financial goals for retirement. However, in looking back at the 2008 crash and its aftermath, the diversification that many had in place served them well if they had the patience to ride out the years that followed.

Diversification of your portfolio to temper the risk that is always present when investing is a wise step to take. Ideally we expect all of our investments to provide perfect returns consistently over the life of the commitment. Realistically, we acknowledge that there are factors that are beyond the control of the markets, portfolio managers and investors that can (and will) create less than optimal investing environments. Taking into consideration the volatility of the markets from 2008 through the beginning of 2017 as well as the steady market recovery that has been realized since early 2017, the evidence is there that when the investing environment is good it can be great and when it’s bad it can be frightening.

Your portfolio manager should regularly meet with you to not only discuss the performance of your portfolio since your previous meeting but to also discuss with you your goals, where you are in life and what he sees as potential volatility in the markets. More specifically,

  1. As you grow older do you need to temper your risk level? – As much as we would like to stop the march of time and the greying of our generations, we must be realistic in how much risk we are comfortable with. When you are young and the horizon that is your retirement is still far in the distance you can be more risk tolerant, as you pass the big ‘6-0’ you may want to start tempering the risk.
  2. How diversified should your portfolio be? – This is not so much a question but a discussion that you and your portfolio manager that will help you to understand what investments would fit your level of risk as well as what will offer you the best level of risk-aversion when markets go through stormy time.

So often in our world, words become ‘buzz words’ and when they do they can attain a status of mystery as to what is really meant. In the case of ‘diversification’ and ‘risk’, the only mystery is how considering both can help you down the yellow brick road to a well-funded retirement. No ruby slippers necessary.

To learn more about the risk tolerance and the benefits of a diversified portfolio, contact the experts at Shapiro Financial Planning Group to schedule an appointment.