How to weigh portfolio risk versus reward

Although often hidden in the background, risk is interwoven into every aspect of our lives. Given this inescapable reality, it is in our best interest to cultivate a sensible, and even cooperative, attitude toward it.   Toward this end it may be instructive to consider the Chinese symbol for “risk” which is a combination of two ideograms, the one being “danger” or “crisis” and the other “opportunity.”  In the West we know this as the risk/reward tradeoff. The goal is never to avoid risk altogether: because that’s impossible, given the realities of the world because without exposing ourselves to risk we cannot take advantage of the opportunities that it offers. So, the question becomes, “How much danger am I willing to court, and what can I expect as a reward for the amount of risk I have taken on?”  This question, and its answers, are at the heart of what we call “risk management.” As fiduciaries entrusted to manage people’s retirement portfolios, our duty is to get the best return on investments that we can while minimizing the portfolios’ exposure to danger.  In other words, what we do is “risk management.” One of the most important factors when it comes to managing risk in a retirement portfolio is time.  This concept of time is captured in our slogan “Investing for all seasons,” which refers to the seasons of one’s life; youth, maturity and old age.  Youth, or young adulthood, is the time to take the maximum amount of risk.  We leave home and either journey afar or begin a new endeavor such as starting a business or learning a craft.  We have energy, enthusiasm that has not been tempered yet by life’s inevitable “hard knocks” and most of all, time.  Time to recover from set backs and time to save for retirement.  Young adults can and should take on the maximum amount of risk in their portfolios because they have the time… | Read More »

Risk in the stock market has increased

For those who follow the stock market on a daily basis, there is no denying the risk profile of the market has increased.  We believe the chance of a five to 10 percent correction in the S&P 500 has increased.  However, if it does occur it will just serve as just a temporary and overdue correction in an extended bull stock market. Why has the risk of a correction increased?  It all starts with valuation.  Over the past 10 years, the S&P 500 Index has traded at an average price to next 12 month’s earnings per share ratio (“P/E”) of approximately 14x.  Currently, the S&P 500 Index trades over 15x on this P/E valuation multiple.  Thus, stocks appear a little expensive.  Typically, the current small size of the S&P 500 P/E premium to historical averages would not worry us as long as the fundamental tone of the market remained strong.  However, there have been a few chinks in the armor that warrant attention and perhaps will constrain further P/E valuation multiple expansion in the S&P 500 and potentially increase stock market volatility. What are the potential concerns?  First, the Russia and Ukraine escalating tension is causing stress in the marketplace.  The United States and Europe have placed economic sanctions on Russia.  These sanctions increase the risk of negative economic consequences in Europe.  Given recent weaker economic data signals out of Europe, the threat of an increased negative economic impact from the sanctions is cause for some concern.  Secondly, the United States has recently shown some initial signs of inflation picking up.  This is a potential concern because it could move up the Federal Reserve’s time frame for increasing interest rates.  Any sign the Federal Reserve might increase interest rates earlier than the market assumes is a negative for the overall stock market. How has Winch Financial changed its portfolio positioning given the new risks highlighted?  Recently, we raised some cash… | Read More »