Introduction
In the world of finance, two essential concepts are risk and reward, and they are intrinsically linked when it comes to investing. The greater the risk an investor is willing to take, the greater the potential reward. This article aims to delve into the relationship between risk and reward and provide valuable insights into how investors can achieve a smart and prudent allocation of their investments by diversifying their portfolio. By ensuring a diversified portfolio, investors can help mitigate risk and reap optimal returns on their investments.
Investing in Stocks vs. Bonds
Investing in stocks and bonds is a classic example of the age-old relationship between risk and reward. Stocks are deemed to be riskier investments because of their tendency to experience significant fluctuations in value over time. Bonds, on the other hand, are often regarded as less risky since they come with a fixed interest rate, which results in a more predictable return on investment. Although stocks may present a higher potential for returns, this comes with an equally high risk of volatility. Therefore, when it comes to investing, weighing the level of risk against the potential rewards is essential in making informed investment decisions.
Time Horizon
When it comes to investing, one of the most critical factors to consider is your time horizon. Investing is a long-term strategy, and the longer an investor stays invested in the market, the higher the potential rewards. While short-term fluctuations in the stock market may cause concerns, they usually balance out over time. Based on historical data, stocks have consistently outperformed low-risk investments, such as bonds, over the long term. Therefore, investors with a longer time horizon, such as those investing for retirement, may opt to allocate more of their portfolio to stocks, even though they are deemed riskier than bonds. By doing so, investors can benefit from the potential rewards that come with investing in stocks while also mitigating risks associated with their short-term market volatility.
Standard Deviation and Volatility
Standard deviation and volatility are essential metrics that investors must consider when evaluating their investments. Standard deviation measures the extent to which an investment’s returns deviate from its average return over a specific period. On the other hand, volatility refers to the degree of variation in the price of an investment over time. These metrics provide a glimpse into the level of risk associated with a particular investment. A higher standard deviation or volatility usually implies higher risk, whereas lower values suggest a lower risk.
For investors who are seeking to mitigate the risk associated with investing in individual stocks, investing in mutual funds or ETF’s can be an excellent option. Mutual funds or ETF’s are managed portfolios that pool resources from several investors and invest in a diversified range of assets, including stocks, bonds, and other securities. They offer a level of diversification that can significantly reduce the risks associated with investing in individual stocks. While investing in funds still carries some risk, it is generally lower than that of investing in individual stocks. As such, they are an excellent investment option for those looking to diversify their portfolio and achieve better risk management.
Structured Investing: A Smarter Way to Invest
Asset class diversification is a proven strategy to manage risk and achieve optimal returns. It involves investing in different asset classes, such as microcap stocks, value stocks, international stocks, and emerging market stocks. By investing across multiple markets, investors can reduce the risks associated with any one asset class while reaping the benefits of several markets. Microcap stocks offer high-risk, high-return potential, while value stocks provide a stable foundation for a portfolio, as they are less volatile than growth stocks. Investing in international and emerging market stocks allows investors to tap into the growth potential of global markets, diversifying their portfolio while offering opportunities for higher returns.
Diversifying across different asset classes helps manage portfolio risk while maximizing returns. This strategy can be beneficial versus simple indexing, which can be limited in scope and risk management capabilities. While indexing may be useful for passive retail investors, structured investing and asset class diversification may be a better approach for those looking to capture global market returns and maximize diversification.
Conclusion
To sum up, risk and reward are two concepts that are closely intertwined in the world of investing. The potential for higher returns often comes with a higher level of risk. Investors who are willing to take on more risk have the potential for higher returns, but they must also acknowledge that the potential for volatility is also higher. While stocks carry more risk than bonds, they also offer the potential for higher returns over the long term. Therefore, it is essential to consider your time horizon and pay attention to the standard deviation and volatility when making investment decisions, as these factors can provide crucial insights into the level of risk associated with a particular investment. By weighing the risks against the potential rewards and making informed investment decisions, investors can manage risk and maximize returns, achieving their investment objectives.
Have a great weekend!
Source: Ballentine Capital Advisors
Golf Tip of the Week
1 Foolproof Drill That Will Instantly Improve Your Putting Tempo
One of the biggest issues that amateurs run into on the green is tempo—or lack thereof. Often, I see golfers that take the club back quickly and decelerate on their follow through. Resulting in inconsistencies with their speed and distance. Not only is this frustrating, but it can also make it more difficult to get a feel for the greens.
To check if your tempo is in good shape, try out the coin drill, demonstrated below by Erica Stoner, one of Golf Digest’s Best Young Teachers. All you need is a quarter, your putter and a target to putt to that’s ten feet away.
Place a coin on the back of your putter to judge your tempo. As you make your normal putting stroke, notice if the coin stays on your putterhead, or if it falls off—and when it falls off. If the coin falls off on the way back, you’re using too much speed in your takeaway. If the coin falls off in your through stroke, you’re accelerating too much through the ball.
Once you’ve got your tempo down, the coin will stay on the back of your putter and your speed and distance control will improve.
Tip adapted from golfdigest.comi
Recipe of the Week
French Onion Soup
4-6 Servings
Ingredients
- 1/2 cup unsalted butter
- 4 onions, sliced
- 2 garlic cloves, chopped
- 2 bay leaves
- 2 fresh thyme sprigs
- Kosher salt and freshly ground black pepper
- 1 cup red wine, about 1/2 bottle
- 3 heaping tablespoons all-purpose flour
- 2 quarts beef broth
- 1 baguette, sliced
- 1/2 pound grated Gruyere
Instructions
- Melt the stick of butter in a large pot over medium heat. Add the onions, garlic, bay leaves, thyme, and salt and pepper and cook until the onions are very soft and caramelized, about 25 minutes. Add the wine, bring to a boil, reduce the heat and simmer until the wine has evaporated and the onions are dry, about 5 minutes. Discard the bay leaves and thyme sprigs. Dust the onions with the flour and give them a stir. Turn the heat down to medium low so the flour doesn’t burn, and cook for 10 minutes to cook out the raw flour taste. Now add the beef broth, bring the soup back to a simmer, and cook for 10 minutes. Season, to taste, with salt and pepper.
- When you’re ready to eat, preheat the broiler. Arrange the baguette slices on a baking sheet in a single layer. Sprinkle the slices with the Gruyere and broil until bubbly and golden brown, 3 to 5 minutes.
- Ladle the soup in bowls and float several of the Gruyere croutons on top.
- Alternative method: Ladle the soup into bowls, top each with 2 slices of bread and top with cheese. Put the bowls into the oven to toast the bread and melt the cheese.
Recipe adapted from foodnetwork.comii
Health Tip of the Week
The Facts On Omega-3 Fatty Acids
What Are Omega-3 Fatty Acids?
Omega-3s are nutrients you get from food (or supplements) that help build and maintain a healthy body. They’re key to the structure of every cell wall you have. They’re also an energy source and help keep your heart, lungs, blood vessels, and immune system working the way they should.
Two crucial ones — EPA and DHA — are primarily found in certain fish. ALA (alpha-linolenic acid), another omega-3 fatty acid, is found in plant sources such as nuts and seeds.
Not only does your body need these fatty acids to function, they also deliver some big health benefits.
Health Benefits of Omega-3 Fatty Acids
Blood fat (triglycerides). Fish oil can lower elevated triglyceride levels. Having high levels of this blood fat puts you at risk for heart disease and stroke.
Rheumatoid arthritis. Fish oil supplements (EPA+DHA) may curb stiffness and joint pain. Omega-3 supplements also seem to boost the effectiveness of anti-inflammatory drugs.
Depression. Some researchers have found that cultures that eat foods with high levels of omega-3s have lower levels of depression. The effects of fish oil supplements on depression has been mixed. More research is needed to see if it can make a difference.
Baby development. DHA appears to be important for visual and neurological development in infants.
Asthma. A diet high in omega-3s lowers inflammation, a key component in asthma. But more studies are needed to show if fish oil supplements improve lung function or cut the amount of medication a person needs to control the condition.
ADHD. Some studies show that fish oil can reduce the symptoms of ADHD in some children and improve their mental skills, like thinking, remembering, and learning. But more research is needed in this area, and omega-3 supplements should not be used as a primary treatment.
Alzheimer’s disease and dementia. Some research suggests that omega-3s may help protect against Alzheimer’s disease and dementia, and have a positive effect on gradual memory loss linked to aging. But that’s not certain yet.
Tip adapted from webmd.comiii
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Disclosure:
Ballentine Capital Advisors is a registered investment advisor. The advisory services of Ballentine Capital Advisors are not made available in any jurisdiction in which Ballentine Capital Advisors is not registered or is otherwise exempt from registration.
Please review Ballentine Capital Advisors Disclosure Brochure for a complete explanation of fees. Investing involves risks. Investments are not guaranteed and may lose value.
This material is prepared by Ballentine Capital Advisors for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation or any particular security, strategy, or investment product.
No representation is being made that any account will or is likely to achieve future profits or losses similar to those shown. You should not assume that investment decisions we make in the future will be profitable or equal the investment performance of the past. Past performance does not indicate future results.
Advisory services through Ballentine Capital Advisors, Inc.
i https://www.golfdigest.com/story/putting-stroke-fix–1-drill-that-will-instantly-improve-your-put
ii https://www.foodnetwork.com/recipes/tyler-florence/french-onion-soup-recipe2-1947434
iii https://www.webmd.com/healthy-aging/omega-3-fatty-acids-fact-sheet
