Managing Risk & Volatility
We manage risk and volatility in two important ways -
First we develop an appropriate asset allocation strategy based on each client's unique risk tolerance. This strategy may include a critical risk mitigation component such as passive fixed income investments - where the intention is to hold until maturity. It may also include selections from a wide range of investments which we determine to have meaningfully reduced levels of correlation to domestic equities. In our view perhaps the most rewarding long term investment opportunity is investing in the stock market - since it comes with a long term average return that is arguably above 10%. However that very enticing return can take a very long time to show up and for many investors the interim volatility is more than they can handle, both financially and emotionally. Therefore we believe that in many cases (but not all) reducing the level of risk below what is necessary to achieve the 10% long term return of equities is fundamental to our approach and appropriate for many of our clients.
Secondly we recognize that there are times when it is prudent to dramatically reduce exposure to all equity markets and we have developed a unique strategy which helps us to avoid over-reacting to normal volatility without sacrificing our willingness to step aside when conditions truly turn negative.