Tradeoffs - Essential to Navigating Investment Decisions

We often have conversations with clients about  tradeoffs.  When it comes to investing, navigating the pros and cons of any strategy is an important area to discuss and fully understand.  

Investing:  Risk and Return Tradeoffs

With investing, there are no free lunches.  That is, it is not possible to invest in a manner to simultaneously earn oversized returns without also accepting more investment risk (volatility).

This relationship between risk and returns has held steady over the long term.  Here are some historical examples: 

• Bonds (lower risk) have returned less than stocks (higher risk).

• Short term, higher rated bonds (lower risk) have returned less than longer term, lower rated bonds (higher risk).

• Stocks of larger companies (lower risk), have returned less than stocks of smaller companies (higher risk).

• Stocks in mature industries (lower risk) have returned less than stocks in emerging industries (higher risk).

For those in, or approaching retirement, the decision about how to structure their portfolio from a risk/return standpoint is an important one. Especially for the vast majority who depend on their portfolio to cover expected living expenses.

The tradeoff here is how much risk are you willing to accept in exchange for the possible returns associated with the portfolio you choose?

Are you willing, and is it appropriate, to take more risk and expose your portfolio to more volatility in exchange for the possibility of higher returns? Or, is it better to accept modest returns in order to limit the short term risk?

As an advisor, this is an incredibly difficult area to navigate and the stakes are high!  At Beacon, we approach this important decision through the lens of your financial plan. 

We consider many factors including the magnitude and timing of distributions, as well as, personal circumstances and preferences to determine the most appropriate mix of investments. We believe that navigating tradeoffs through the eyes of a financial plan will offer the highest probability of a successful investment outcome and provide peace of mind during periods of financial uncertainty.