How to Invest to Reduce Risk and Increase Return

by Chris L. Meacham, CPA

The primary objective of an investment portfolio should be to reduce risk and volatility while at the same time generating desired returns.  Although achieving this outcome is not easy, with a bit of care and sophistication a portfolio can be designed to do just that.  It requires an extremely diverse investment portfolio using both traditional and non-traditional investments, sometimes referred to as "alternative investments."

 

The proper approach to significant diversification across multiple asset classes is to have investments with low correlation to each other.  As you move into the world of alternative investments, which historically have low correlation to the stock market, your investment world becomes more dynamic and sophisticated.  You are exposed to more opportunities and to different plays. You are able to sell out of strength and buy into opportunity; or in other words, buy low and sell high.  While diversification can neither ensure a profit nor eliminate the risk of losses, proper diversification across non-correlated asset classes offers the potential to reduce the volatility in a portfolio while increasing returns.

 

Historically, alternative investments were the exclusive domain of the ultra wealthy, but in recent years have become more accessible.  Just as it takes a unique combination of musical instruments for an orchestra to produce a symphony, the addition of alternative investment instruments can enhance a portfolio.  As a general rule, alternative investments are accessed through the private market, in contrast to traditional investments that are accessed through the public markets.

 

The world of alternative investments is extremely broad and tends to be more complex in nature.  It includes any investment other than the traditional stocks, bonds, and cash.  Some examples would be direct ownership in real estate, hedge funds, managed futures, commodities, trust deeds, oil and gas, private equity in operating companies, etc. Due to their breadth and complexity the average investor may have difficulty understanding the intricacies, risks, and rewards of alternative investments.

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Chris Meacham is President and CEO of Cornerstone Wealth Management LLC. Cornerstone Wealth Management helps you envision your future which is as unique as you are. Only you can define it. Once you envision it, Cornerstone creates and implements a custom plan to help you attain it. Chris is a member of a Forum in San Diego and has been a guest speaker at several other Forums in Southern California. 

Email Address: chris@cornerstonewm.com 
Web Site: http://www.cornerstonewm.com

Reprinted from "The FORUM Newsletter," a publication of Renaissance Executive Forums, Inc. All rights reserved. Unless otherwise indicated copyright is held by the author. Please contact the author directly for permission to reprint or republish this article.