Avoiding large losses in your portfolio
Published 10:00 pm Thursday, October 31, 2019
By Mark McGahee
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” — Warren Buffett
Risk is a factor in any investment decision that you make. Your tolerance for risk is something that you will want to consider when you make decisions alongside your trusted financial professional. Your risk tolerance is balanced against your time horizon, meaning the time between now and your anticipated retirement date.
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But is it possible to avoid a loss? No, not completely, but you can take steps to manage that risk when investing. This is where conversations about your risk tolerance are critical.
What would you rather have, $500 right now or a 50 percent chance at $2,000? Many people go for the $2,000, and rightfully so. Since you have a 50/50 chance, a decision tree shows the $2,000 answer carries a potential value of $1,000.
But let’s add a few zeros and see if that changes your perspective.
What would you rather have, $50,000 right now or a 50 percent chance at $200,000? The decision tree says the opportunity to win $200,000 has the highest potential value. But in reality, many people second-guess that decision, because $50,000 is a lot of money.
Remember, there is no correct answer to the questions. They simply help you better understand the concept of risk.
Investment risk can be managed, but it can’t be eliminated entirely. All investments carry some level of risk. And in general, the greater the risk an investment carries, the higher its potential return.
Risk happens, but don’t let it get in the way of your dreams. Ultimately, these concerns should only serve to inform you and the questions that you ask the financial professional you are working with. The conversation should include your questions about the risks for each strategy presented, as well as questions from your professional about the retirement you want and the aspirations you hope to realize.
Mark McGahee can be reached at 539-9465 or firstname.lastname@example.org.