Embracing Volatilty

Risk and Return Are Related

Nearly all of the mistakes made by investors can be attributed to the mismanagement of risk: underestimating or overestimating risk, not understanding risk, disregarding risk, miscalculating risk, or the failure to consider all forms of risk. Long-term investing, with the goal of accumulating sufficient capital to secure a lifetime of income in retirement, requires proactive risk management and a firm understanding that risk and returns are related.

For as long as there has been stock markets, investors have intuitively known that expectations of returns come with commensurate expectations of risk; the higher return one expects, the greater the risk one assumes in order to achieve it. But, it wasn’t until the 1980s and 1990s that a series of research reports revealed just how important an understanding of risk is in constructing investment portfolios that could achieve above-average rates of return while reducing portfolio value volatility.

At its simplest, the deliberate assumption of risk, when applied to a properly diversified portfolio, drives return performance. In essence, it is through the management of risk, not the management of investments, that optimum portfolio construction takes place and superior long-term returns are achieved.

Investors who want to earn above-market returns must be willing to take higher risks in their portfolio. At Winship Wealth Partners we utilize investment principles and practices grounded in decades of academic research to help our clients to optimize their risk/return performance.