Avoiding Risk is Not a Proper Strategy

The day after the election, the S&P 500 index rallied about 2.2%.  If you had $100,000 invested in the S&P 500 index, your portfolio would have appreciated $2,200 on that day.  On the other hand, the yield for a current 5-year brokerage CD is 0.5%. If you invest $100,000 in this CD, the total return at the end of the 5-year holding period is $2,525.  Thus, what an investor can earn by investing in a CD for five years is only marginally higher than what the market provided in a single day.

I am not advocating that our clients invest every penny they have into the stock market.  The comparison here is to remind our clients that avoiding risk is often not a proper strategy.  By trying to sidestep the stock market, investors run the risk of deteriorating their purchasing power.  As investment advisors, our job is to help clients identify different risks that they might encounter and manage these risks via an appropriate asset allocation strategy.

All comments and suggestions are welcome.

Wenny Gorman, CFA, CFP®