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Achieving Returns With Risk Tolerance In Mind

Unfortunately, many advisors look at the upside of a stock and portfolio without adequately considering the downside. Like many financial assets, one of the inherent risks is volatility. Nevertheless, people invest in the stock market eager to achieve higher returns than other financial assets can provide.  But emotions like fear and greed can lead both advisors and investors to make poor decisions.  Warren Buffet says “Be fearful when others are greedy and greedy when others are fearful“.  Many investors may not be prepared for volatility, fail to communicate when it is needed most, and bail out at the worst time. Hedge fund manager Joel Greenblatt referred to a passage in his book ‘The Big Secret for the Small Investor’ in which he discusses the flaw in such a method:

‘A study looked at the best-performing mutual fund of the decade 2000-2010. That fund was up 18% a year, 100% long US equities. The market was flat during those 10 years, so 18% up a year was pretty good. Unfortunately, the average investor in that fund, on a dollar-weighted basis, managed to lose 11% a year, because every time the market went up people piled in, when the market went down they piled out. When the fund outperformed they piled in, when the fund underperformed they piled out. And they took an 18% annual gain and turned it into an 11% annual dollar-weighted loss’.”

We search for opportunities created by volatility and leverage our knowledge and experience to provide timely advice to our clients during volatile periods. As Warren Buffett explains, “The most important quality for an investor is their temperament not intellect.”

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