Being a Navy SEAL and sniper taught me all about risk management. Take away all the risk variables under your control and reduce it to an acceptable
level. – Brandon Webb
There are many things you can’t control in your life – the weather, the traffic, the economy, government policies to name a few.
When it comes to investing there is a simple strategy you can control – one that can ultimately protect and grow your wealth.
What is this strategy? Successful investors control their risk.
In finance, there is a relationship between risk and return. In theory, if you are willing to take on greater risk, there is the potential for a bigger return. But, risk also includes the potential to lose some or all of your investment.
Another condition involved in risk – is how readily available your money is to you. Is it liquid, can you access it fast if you need it? An example of an illiquid investment is real estate. It can take months to sell your asset and get access to your money when you need it.
The stock market is defined as a risky asset and one that involves significant volatility. Stocks can lose some or even all of their value if market conditions go south. Yet, investors are willing to take on that stock market risk in hopes of gaining a larger return than from a bond or CD.
When you look at your portfolio – ask yourself – what does a big decline in my investments mean for you, like the one stock investors experienced in 2022?
The stock market fell over 20% earlier this year and many individual stocks and cryptocurrencies registered much bigger losses. We are now heading into an investing cycle where stocks could dramatically under-perform in the years ahead amid weakening economic growth, rising interest rates, accelerated inflation and record levels of government debt.
Are you taking on too much risk? This is a great time to review your portfolio and make changes to help get you on track.
In the investing world, you can reduce your risk dramatically through diversification. Allocating up to 10 or 15% of your portfolio, based on your personal risk tolerance level, to gold can add stability to your portfolio and reduce your risk. Gold ownership diversifies your portfolio and reduces your risk because it has a negative correlation to stocks. That means while stocks go down, gold typically rises in price. Owning gold helps you control your portfolio risk.
Another advantage of gold is that it is a very liquid asset. Gold is money. Gold can be easily transported anywhere in the world and traded in for paper money. Every country on earth recognizes gold as money.
Indeed, gold is the fourth most liquid investment in the world, according to World Gold Council data. That means you can sell it the same day for paper money if you need to. Access to your money via gold in a crisis, market stress or simply anytime you want it – is one of gold’s prized characteristics.
As the Navy Seal said at the start of this article, risk management includes removing all the variables under your control. Are you too heavily invested in risky assets like stocks? Could you control your risk more effectively by increasing your allocation to gold? If you would like a personalized consultation on how much gold ownership could be appropriate for you, call a Blanchard Portfolio Manager today.
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