By Gerald Robinson, CFP®
The truth is that all investments involve some degree of risk. Understanding and managing those risks with solid risk management strategies is key to helping investors move toward their financial goals and make wise decisions.
Over my 25 years of investing experience, I’ve developed a true appreciation for managing risk in my clients’ portfolios. Risks like major market corrections are unpredictable and can significantly impact short-term and intermediate goals. To reduce adverse results, it’s crucially important to address these unpredictable risks by regularly updating my clients’ portfolios.
Let’s look at one period of investing history to better understand the impact or risk:
On September 18, 2007, the Federal Reserve Board reduced the Fed rate from 5.50% by 5.00%. The Fed made nine more cuts all the way down to a Fed rate of 0% to .25% by December 16, 2008.
During this period the S&P 500 closing index went from a 1565.15 high on October 9, 2007, to a low of 676.53 in just 15 months on March 9, 2009. This was a drop of 56.78%! The S&P 500 closing index did not exceed the 2007 high again for over five years until May 28, 2013.
Here is one of my favorite quotes regarding recessions:
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” — Peter Lynch
My experience tells me when safer investments offer good returns, investing becomes easier because you have readily available funds to put to work when an attractive buying opportunity arrives. Staying fully invested in equities during a significant market downturn without managing risk can be devastating to your goal achievement.
Here is another favorite quote referencing investment management risk:
“The essence of investment management is the management of risk, not the management of returns.” — Benjamin Graham, The Dean of Wall Street
Here are a couple things to keep in mind regarding managing investment risk:
Limit Emotional Investing
An investor’s risk tolerance can be greatly impacted by their emotional investing decisions. When fear and greed influence decision-making, the following outcomes can occur:
- Impulsive behavior: Buying and selling assets at the wrong time, resulting in losses.
- Inaccurate risk assessment: Emotional biases can cloud judgment, making it hard to correctly assess risk and make wise long-term investment decisions.
- Inability to follow through on a plan: Fear can motivate a sale during market downturns, losing out on possible gains.
- Increased volatility: Emotional investment can exacerbate market volatility, which can in turn create a more challenging environment for investors.
Limiting emotional investing gives investors the opportunity to reduce risk to their portfolio value. Here is a favorite quote regarding emotional investing:
“Buy when everyone else is selling and hold until everyone else is buying. That’s not just a catchy slogan, it’s the very essence of successful inverting.” — J. Paul Getty
Stay Informed
Effective risk management strategies require keeping up with economic statistics, market movements, and geopolitical developments. Staying current allows you to:
- Determine any possible risks by being aware of new risks that can affect your assets.
- Make well-informed choices by modifying your portfolio in response to shifting market conditions.
- Reduce losses by being proactive in safeguarding your investments against unfavorable circumstances.
- Leverage opportunities and profit from favorable market circumstances.
Another favorite quote regarding bull markets to consider:
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” — Sir John Templeton
The Bottom Line
Remember that risk management is a continuous process. For help customizing and continuing strategies that fit your unique goals and risk tolerance, a wise move is to consult a professional financial advisor.
I’ll close this article by sharing another one of my favorite quotes about the importance of professional risk management strategies:
“You get recessions, you have stock market declines. If you don’t understand what’s going to happen, then you’re not ready, you won’t do well in the markets.” — Peter Lynch
Reach Out Today!
Designing and maintaining the right risk management strategy for your unique needs can be challenging. The good news is that you don’t have to do it alone.
At LightForce Financial, we have the knowledge and experience to design and implement a personalized risk management plan for you. We can offer insights and strategies you might otherwise overlook.
To schedule an introductory meeting, call (817) 896-2744, email gerald@lightforcefinancial.com, or select an appointment online.
About Gerald
Gerald Robinson is Founder of LightForce Financial, a fee-only financial services firm based in Denton County, Texas, specializing in guiding multi-generational families and small and mid-sized business owners through the inevitable—change. Gerald and his firm provide one-on-one service and a long-term approach to goal achievement. He’s fulfilled by developing long-term relationships with clients as he helps align their wealth and values through a personalized financial plan.
After graduating with a BBA with a focus on finance and statistics from UNT, while serving in the United States Marine Corp Reserve, Gerald began a long career in mid-management of a large retail food chain. In 1999, with the desire to serve clients by building a business that would be of value and positively impact their lives, he returned to his roots and began his journey as a financial professional. In 2009, Gerald acquired his CERTIFIED FINANCIAL PLANNER® designation, and now serves clients as an independent CFP® professional on a fee-only basis—no commissions. For over 30 years, Gerald has lived in Flower Mound with his wife; he also has three children and five grandchildren. In his spare time, he enjoys staying involved in his community, serving on various commissions and boards. To learn more about Gerald, connect with him on LinkedIn.
This presentation is not an offer or a solicitation to buy or sell securities. The information
contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice. Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website.
Past performance is not a guarantee of future results. Diversification and asset allocation do not ensure a profit or guarantee against loss. Registration with the SEC does not imply a certain level of skill or training.