Why We Focus on Risk First
Hello from Sycamore,
Once we understand your financial goals, we focus on the risk/return ratio of investments. Many of our new clients understand this to mean ‘high risk equals high reward,’ but it’s a bit more involved. At Sycamore, we believe that capital loss is a greater danger to your investment portfolio than return loss. Let that sink in as you consider this example.
You’ve invested $100,000 and have a great year earning 50%. Bravo! You are flying high, and the champagne tastes excellent. Next year, the markets will not be so sweet, and your investment will decline by 50%. Are you and your original $100,000 back to square one? Your average rate of return might appear to be 0% (+50% and -50%). However, when we run the numbers, a different picture emerges:
Year One: $100,000 plus 50% = $150,000.
Year Two: $150,000 minus 50% = $75,000.
In our example, your average rate of return was 0%, but your portfolio declined by 25%. That doesn’t seem fair, but it’s the way math works. Flash rates of return are an effective way to catch an investor’s attention but could fail to harness the full potential of every investment dollar in the long run. From an investment perspective, there’s only one bottom line:
It’s more important NOT to have a negative performance than to have a positive one.
High Risk/High Reward investors may label this as a conservative approach, but we do not. Every dollar lost is one dollar that will never work for you again. Warren Buffett – no slouch as an investor – said it best:
Rule 1: Don’t lose the money.
Rule 2: Don’t forget rule number one.
We’d like to be aggressive and win every time, but none of life’s endeavors work that way. In fact, most of us learn early on that we must hedge our bets for the smoothest ride. As we move up the risk/return graph, there comes a point where the risk is simply too significant – think of betting all you have on a single race at the Kentucky Derby. The odds are not in your favor.
If you lose your money, it just doesn’t make any difference how smart you are next year!
Our single objective here at Sycamore is to help our clients reach their goals. When you trust us with your money, our priorities are twofold: the safety of your capital and steady investment growth. We seek out companies and funds with established track records. We look for gains largely independent of the prevailing market winds. Some years will outperform others – bull and bear markets are a fact of life, and your portfolios will almost certainly lose money from time to time – but what we want to capture for you is a positive long-term performance.
Thanks for your business and trust!
Sincerely,
The Sycamore Financial Group Team with Anita Jay
*This article is distributed for general informational and educational purposes and is not intended to constitute legal, tax, accounting, or investment advice.