News & Articles
Portfolio Protection
April 01, 2007
by R. Patricia Grenier, CFP®, CSA
The one common theme all investors share is to not lose principal! In the investment world it is the 11th Commandment. For example, a $100,000 portfolio, which suffers a 25% decline, requires about three years of 10% returns to recoup its loss. Whereas the same portfolio with a steady 8% return will be valued slightly over $125,000 in the same three year period. While there does not exist a guarantee, investors should be aware of the financial principals that can minimize risk and promote consistency of returns.
Time can be our friend. The sooner you start putting together an investment plan, the better. Time allows the investor the ability to ride out the ups and downs of the financial markets. The longer the time frame, the more aggressive a portfolio can be structured.
Time also allows a person to invest on a monthly basis or to dollar cost average. The price you pay may not be the lowest, or the highest, but given enough time, the best average price. If you can ride out a market decline, purchasing a sound investment at lower prices will allow an investor to purchase more shares with the same dollar amount.
How investment monies are allocated can also lessen the risk and promote consistent returns. A well-diversified portfolio will insure that investors take advantage of different industries, geographic opportunities, and traditional and non-traditional investments. In addition, diversification lessens the concentration and overlap of monies. There will always be under performing investments. Diversification is the key to reducing exposure.
A well diversified portfolio also means selecting an allocation between stocks, bonds, and cash that fits with risk tolerance. Remember, sometimes you need to add a little risk to lessen the overall risk. This seems contrary to what we want to do, but studies of historical performance have shown that stocks, bonds and cash, are less risky combined than on their own.
Another strategy you, as an investor, can implement on a continuous bases is to monitor and rebalance how your monies are allocated. If one sector has outperformed and now it represents a higher percentage of your overall monies, then it is time to capture those gains. Applying these gains, to an appropriate allocation will reduce risk and position your portfolio for growth in other sectors.
There aren't any perfect investment strategies. Investing involves risk. Managing risk and maintaining consistent returns is the key. Remember, greed and fear are your enemies.
Pat Grenier is a General Partner with BRP/Grenier Financial Services in Springfield, MA. Securities offered through Cadaret, Grant and Co., Inc., Member FINRA/SIPC. BRP/Grenier and Cadaret, Grant and Co., Inc. are separate entities.
Pat can be contacted by phone at (413) 736-6712, or email her at pat@brpgrenier.com
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This article appears in the April 2007 issue of Western Mass Business Woman.