Focusing on risk mitigation should be a core part of your investment philosophy. But despite the focus on fluctuation risk, there are many other types of risk you need to consider. Ignoring any of these risk categories might cause you to be swallowed by a black swan event and kill investment values.
A few of the risks you should monitor include the following:
- Inflation: will cost of living increases erode purchasing power?
- Solvency: will assets purchased remain viable?
- Liquidity: are assets readily available for liquidation as cash needs require raising of funds?
- Market: are assets utilized in portfolios subject to excessive risk related to market swings?
- Economic: how are assets and overall allocations impacted by changes in economic conditions around the world?
- Macro: what broad condition changes might negatively impact portfolio strategies?
- Trend and Theme: what trends are emerging that might impact positions and portfolios?
- Fluctuation Intensity: what is the intensity of price movement of assets within portfolio strategies?
Look at each of these risks on an individual asset AND an allocation basis and put them at the forefront of your thinking as we develop strategies.
But there is an art in managing your assets; you cannot simply focus on risk but must also focus on return as well. Just as in sports where both defense and offense are equally important, a balancing act must occur as you develop a framework for investing. Don't be dogmatic.
Our philosophical framework at DWM tends to hedge towards risk mitigation and we are willing to sacrifice some return as we create strategies that are survivable in different environments. It's a careful trade off and one we make every day as we make investment decisions. But that might not be the right choice for you; perhaps return is most important. That's fine but just make sure you know what might happen if your opinions on an investment turn out to be wrong. Know the bad outcome before you make any investment.
Sound complicated? It is. But a complex decision making strategy is necessary in a complex world. That's the reality in today's surreal world.
Michael Yoshikami, Ph.D., CFP, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010, 2011 and 2012.