When talking about investments, you’ve probably heard that higher risk means higher returns. Of course, since the future is unpredictable, it really means the expectation of higher returns.
Essentially, investors expect to be paid to take on higher risk. Investors purchase stocks and bonds hoping to make a profit on their investment. In the case of stocks, they expect a capital gain as the stock price increases, and in the case of bonds, they expect income based on coupon on the bond. Investors demand a higher return—the expectation of greater price gains on stocks or higher yields on bonds—for taking on greater risk.
Risk is one of the most critical variables when it comes to investing. Uncertainty or pessimism can cause prices to decrease, allowing for a higher potential return. When those conditions change—when people are optimistic about a company or the economy—prices might rebound, assuming the underlying fundamentals remain intact.
With risky stocks or bonds comes price volatility, the daily zigs and zags typical of the market. But how can you protect your portfolio from day-to-day market fluctuations?
Here are a few common strategies that investors may use to protect their portfolios from market volatility:
Each of these strategies comes with a trade-off. For some strategies, the trade-off is time—with time also comes the need to ignore daily fluctuations. Other strategies require higher costs, and some expose you to other risks like liquidity or trading execution. The point is: there is no free lunch.
The key is to understand your expectations about gains and losses—would you be more upset to miss out on a raging bull market or to see your portfolio lose a quarter of its value in just a couple months? It’s not enough to try to control risk: you also should know how you might react to large market swings—up or down—to gauge your comfort with uncertainty.
That’s where United Capital comes in. They will be empathetic to the broad range of emotions that can arise from the hot-button topic of money. Sometimes, the most important—and easiest—thing to do is nothing: watch the market gyrate while knowing that you’re properly positioned to reach your goals. But that confidence will come after you’ve worked with an advisor to create a portfolio strategy that is best for you.
With confidence in your portfolio, you can shift your focus to what really matters in your life—which probably doesn’t include how the Dow Jones Industrial Average performed today.
Disclosure: United Capital Financial Advisers, LLC (“United Capital”) provides financial life management and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, United Capital has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained herein is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances.
United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.
The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances. Please contact your financial adviser with questions about your specific needs and circumstances.
Information and opinions expressed by individuals other than GS PFM employees do not necessarily reflect the view of GS PFM. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.