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The Five Myths that Put Portfolios at Risk: A Five-Part Series

The Five Myths that Put Portfolios at Risk: A Five-Part Series

Risk has always been present for investors. It used to be that a diversified stock and bond portfolio was usually enough to protect clients from the worst of the financial markets and global economy. As clients aged or grew more conservative, balanced accounts were easily adjusted by shifting money from stocks to bonds. But we live in a different age where bonds can be as risky, and even riskier than stocks.

The markets of the past are not the markets of today. Technology, the increased interconnectedness of economies and trade, and the birth of new asset classes such as volatility, and the growing use of derivatives to manage fixed income and equity exposures continue to change the markets. The Great Financial Crisis of 2007 and 2008, and now COVID-19, proves that newer approaches are needed to protect portfolios and help people prepare for retirement.

This series intends to illuminate a pathway that will help advisors safeguard their practices and investor accounts. At StratiFi, we believe in a much greater focus on defining and managing risk. A risk approach is widely used among institutional investors, but many individual investors and advisors do not broadly understand the concepts and disciplines.

In the shadow of two of the worst financial crisis since the Great Crash of 1929, risk has become more nuanced as the markets have become increasingly interconnected. Historical patterns that have long animated the securities industry’s reliance on diversification and many other principles of Modern Portfolio Theory (MPT) are no longer the constants that they once were.

Advisors, and investors, must incorporate investment approaches to ensure that their investment accounts are properly situated and withstand the rigors of a modern, electronic market. It is also essential to confront a critical fact that is seldom discussed: investors generally don’t have enough experience in the financial markets to measure advisors’ recommendations against their experience. Merely focusing on long-term gains, and minimizing the difficulties that arise to challenge investors, can become a recipe for disaster. Investors increasingly want advisors to do much more than take credit for the market’s gains.

Throughout this series we will address the five myths that put portfolios at risk:
Myth 1: Diversified portfolios lessen volatility
Myth 2: Sell stock to reduce concentrated risk
Myth 3: Tail risks are rare
Myth 4: Long-term investors ignore short-term corrections
Myth 5: Retirees are conservative investors

As our global economy hurts from COVID-19, high unemployment, low GDP, and uncertainty around interest rate and tax rate increases, tension will flow into the markets at some point. Our position at StratiFi is that risk isn’t always bad when managed appropriately.
Our PRISM™ risk analysis software uses a blend of risk tolerance questionnaires, historical market events, and current market signals to provide advisors with all the data they need to know their customers and plan accordingly. Contact us to find out how StatiFi can help your practice.

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Bob Veres features StratiFi in ‘Inside Information’ February 2022 Edition

Bob asks, “Is it really possible that a portfolio risk assessment tool for wealth managers could be as sophisticated as the algorithms that institutional teams are using?”

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