WHY HAVE A BALANCED PORTFOLIO?

We were on the mountain this week and Jayden and his friend wanted to go for an ATV ride. It was late afternoon so I let them go on condition that they were back by dark. Later on, as the sky darkened I was wondering when the boys might get home and realized I had given them bad advice. By telling them to be home by dark, I hadn’t allowed any room for error. There are lots of ways to run into trouble on the mountain, from a serious accident to a less serious mechanical breakdown, or simply getting lost. Even the most experienced riders can get turned around in the forest. By giving them instructions to be home by dark, I didn’t leave any room to go looking for them in the event they failed to show up.  There is no cell service on the trails and once it gets dark, finding someone can be very difficult. Needless to say, we were glad to see them pull in just as the last light was disappearing.
 
Investors often come to me with an odd request. They tell me that since the markets are pretty good they want me to keep their investments overly aggressive but, to move them to safety if things change. It would be great if that were possible but the reality is, when the markets turn against you there isn’t always a lot of warning. Sometimes by the time the markets go dark, as it were, it’s too late to do anything about it. This is one of the reasons I emphasize taking a more balanced approach to investing. In a sense, it is like giving you room for error. A balanced portfolio, by design, may have some investments that are doing very well and others that may not be doing quite so well. Then the investments may switch places. The goal is to get a favorable rate of return overall, while not exposing yourself to more risk than is reasonable. It is a trade-off.
 
Since I didn’t give the boys any room for error, I realized that I had exposed them to too much risk. A simple flat tire could have become a major problem given the difficulty of finding help in the dark. By asking them to be home an hour before dark they would have had a little less time for fun, or perhaps a little less return as it relates to investing, but the price would have been worth the reduced risk. It has been my experience that trading off a little return in exchange for less risk can result in a more positive investing experience over time. As with four wheeling, a flat tire eventually will happen and when it does you will be glad you saved that extra hour of sunlight to help you find a solution.