At Paracca Wealth Advisors, we believe that just because you have a low risk tolerance, doesn't mean that you shouldn't have the opportunity to participate in the stock market. Yes, the stock market is one of the "riskier" asset classes - but there are ways to mitigate that risk. Using our proprietary Option Enhanced Portfolios®, our advisors can effectively "insure" portfolios from downside risk.
Options allow our advisors to not only generate "rental income" on your portfolio, but also protect your portfolio by "insuring" it. Very similar to other forms of insurance (car, homeowners, life, health, etc.), options offer insurance in case of catastrophe.
Another way we mitigate risk is by over-diversification. Now you're probably thinking something along the lines of "I don't want to be too diversified" or "I thought I was already diversified with stocks and bonds". The answer to both of those is that the more diversified you are, the higher your overall annual return will be and the traditional "stock and bond" portfolio doesn't cut it anymore. You need a diversified mix of uncorrelated asset classes in your portfolio such as stocks, bonds, treasuries, real estate, commodities, private debt, farmland, timber, etc. These might not sound like sexy investments, but they are uncorrelated and hedge against each other. For example, in an uncertain inflationary environment, investments like commodities, farmland, timber, and short term debt often perform well during these times when stocks and bonds would take a hit on the chin. We saw this happen in 2022.
When most advisors encounter a client with a low risk tolerance, they simply put the client in risk free assets such as CDs, Treasury Bills, Fixed Annuities, and bonds. Often times, these investments can't even keep up with inflation after taxes are calculated in. At Paracca Wealth Advisors, we believe this approach is unfair to the client, as most low risk clients would say "COUNT ME IN!" if they were offered higher returns with the same low risk. We work hard to earn your money the best return possible while taking the least amount of risk.
Opportunity risk is exactly what it sounds like. It's the risk of missing out on opportunities in the market, most commonly caused by portfolio inactivity. Imagine you're at a buffet with limited stomach space and a wide variety of dishes. When you choose to fill your plate with pizza, you're not only enjoying the delicious cheesy goodness but also passing up the opportunity to try other dishes like sushi or pasta.
Similarly, in investing, opportunity risk is like the dishes you miss out on. It's the potential benefit you forgo when you choose one investment option over another. So, if you invest all your money in bonds or cash, you might miss out on potential gains from stocks or real estate. If you invest all of your money in high growth companies, you miss out on the stability that comes with dividend paying companies. Just like at the buffet, by choosing one option, you're sacrificing the opportunity to benefit from others.
So how do we mitigate opportunity risk? Well, we can't predict the future. If we could, we would all be sitting on a beach in the Caribbean right now. But what we can do is pay attention to what is happening currently, and maintain our portfolios accordingly... which is active portfolio management.
Now market risk is a bit different. Market risk is the possibility that the value of your investments could go down because of factors like economic changes, political events, or even natural disasters. It is pretty much uncontrollable. In order to mitigate market risk, it's important to diversify your investments that are uncorrelated to each other. Another way to mitigate market risk is to hedge your portfolio, or in other words have "portfolio insurance". When your portfolio is insured, you will make money when the market goes down. Similar to life insurance, homeowners insurance, and other forms of insurance. For more information on how we used advanced hedging strategies for our clients, check out our Option Enhanced Portfolios®.
