For almost everyone in investing, there are two main risks:
1. The Risk of Losing Money
2. The Risk of Losing the Opportunity to Make Money
Of these two risks, we can choose to eliminate one or the other but not both. Let’s take a deeper look at the two risks:
1. The Risk of Losing Money
This is a risk that we understand rather easily when it comes to investing. We should all understand that when we use our money to invest, there is risk involved. Here, the risk is that the investment could lose value. To cut this risk, one could hold their entire investment portfolio in cash.
2. The Risk of Losing the Opportunity to Make Money
If the first risk scares you, then you can decide to hold cash. However, holding cash takes away the opportunity for money to grow. Most everyone needs their cash to grow over time. Especially when you take into consideration inflation and investment goals.
So what is your perfect investment portfolio?
Most of us will have to combine both risks, striking equilibrium at a point that makes sense. A major function of investment advisors is to find the sweet spot. Balancing both emotions around risk and the desire to achieve financial goals. There is a unique portfolio everyone should feel comfortable with.
Your perfect investment portfolio is one that you can stick with over the long term. One analogy I like relates an investment portfolio to a diet. An extreme diet is way too hard to stick to for most of us, and therefore will not provide any benefit over the long term. A more moderate lifestyle change is easier to maintain for better long term results. In investing, extremes are hard to maintain over the long term as well. As a result, most people select a more moderate investment approach.
Combining a thoughtful investment approach with long term perspective keeps individuals invested through all market scenarios. Remaining invested properly over time is what turns the financial goals into reality. Long term financial success starts with finding your perfect investment portfolio.
