when to take risk
We're comfortable when making money
but few are prepared to lose it
Taking risks beyond your comfort level, sometimes it works out well and other times it does not. In most cases you don’t need to take on speculative risk in order to achieve your desired goals. Taking defined risks as part of on overall diversified strategy is not a bad idea, but stick to your plan framework. Our investment role is to find our clients the highest rate of investment returns for the lowest risk possible, inside their comfort zones. Buying speculative stocks is usually a risk not worth taking.
Increased returns vs Increased Risk
To achieve more return you have to take on more risk. Risk and return are intertwined. If there was an investment available that gave you a disproportionately high return given the risk involved, others in the market would figure it out and also try to capitalize. This demand would in turn drive up the price of the investment to a point that is comparable to other investments that have similar risk/return characteristics. Each and every minute of every day publicly traded stocks and bonds continually adjust to new information.
Smaller vs Larger Companies
Smaller companies with less capital tend to be more risky than larger companies with more capital (there is a greater degree of price fluctuation in small companies vs. large companies). This means that investors are expecting a higher return as a reward for taking on this extra risk.
A value stock tends to trade at a price below its fundamental worth. In other words, investors are either ignoring the company or viewing the company as more risky relative to its peers. When looking at value companies you have to separate those companies that are a bargain due to a mis-pricing by the market, and those companies whose price is low because there may be trouble looming.
So, in effect, small capitalized and value stocks, although more risky, can have a place in a well-diversified portfolio.
At Oaktree & Associates we make sure that your portfolio and your asset allocation is consistent with your overall risk profile and your comfortability.