July 2012

Risk Is Not Dangerous

By: James Parkyn

Many people, including clients, are reading the news headlines about instability in Europe and want their investment dollars as far from the Eurozone as possible. As a teachable moment, however, this situation pointedly illustrates the fact that “risk” does not necessarily mean dangerous.

Many investors were bruised by the recent financial crisis and some still feel its aftershocks, so it’s understandable that “risk” is a factor in many investment decisions. To the average investor, an element of risk can quickly feel dangerous, and many equate “danger” with a permanent loss of capital or principal.

Risk, however, has to be considered in a broader context. There will always be negative forces afoot and they can cause scary fluctuations in global markets, but risk is not always dangerous if you are investing in healthy assets that are undervalued. From our perspective, an ultra-diversified portfolio can help take the danger out of risk. More on that in a moment.

Consider that taking no risks also carries a cost. For example, a seemingly no-risk portfolio would be all-cash and rely on deposit interest rates. Inflation, however, would quickly become your enemy since it is outpacing interest rates these days. Over time, that “no-risk” portfolio would become truly dangerous as your purchasing power or capital is eaten away.

So, what steps can you take to profit from risk over the long-term? First, portfolio diversification is the only free lunch these days. PWL Capital, for instance, does not concentrate portfolio dollars in any single area. The average Eurozone portion of a portfolio is no more than 2%-7% — often comprising hundreds of well-priced companies in diversified sectors that tend to generate the highest expected returns. European manufacturers of luxury goods, for example, have a bright future ahead as many emerging markets shift from an exportbased economy to a consumer-based market.

Second, you need to be disciplined in taking on risk, with a good portfolio mix that balances fixed or safer investments with those that may fluctuate over the short-term. Third, you need a long-term view of your portfolio and the resolve to stay the course and ignore the headlines. With those guiding principles in mind, you can remove the danger from risk and focus on the opportunities.

James Parkyn

Portfolio Manager
PWL Capital Inc.