What is a Security Investor?
Investors with a high financial personality score in Security believe it’s important to know they have enough invested to meet their goals and that their financial future is well taken care of. Protection, rather than risk, is their dominant investment objective. This is in contrast to investors who believe in taking calculated risks to achieve growth.
Research and validation are part of a Security investor’s identity. They are often willing to put in plenty of effort to get to a higher level of understanding required to provide them with comfort surrounding their decisions, or to work with a professional who can provide this for them.
This type of investor may benefit from guidance in understanding the possible losses in their portfolio. Communication with a financial advisor may help in their ability to stay the course during market fluctuations and in understanding the impact of not staying invested during even the most turbulent times.
Security Investors may seek to protect their portfolio by investing in assets such as commodities, real estate, or even precious metals, with the objective of generating growth while managing risk.
Topics in Security Investing
It is a truism of investing that risk and reward go hand in hand. Basically, that means if you want to earn more than the low returns available generally associated with “safe” investments that will not lose value, like bank certificates of deposit (CDs), you must accept some risk. That risk comes in the form of the potential for losses on the principal you invest, and in finance, is often measured by evaluating historical behaviors and outcomes. You will, however, see a disclaimer on almost all financial products that states “past performance is not indicative of future results.”
Risk is unavoidable, but every investor must ask themselves how much risk they’re willing to accept to pursue higher returns. Risk assets are those that have significant price volatility, such as equities, commodities, high-yield bonds, real estate, and currencies. Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security.
When considering risk, it’s also important to recognize the difference between risk tolerance and risk capacity. Risk tolerance is how much risk you can handle emotionally. Risk capacity is how much risk your portfolios will have to assume to achieve your goals. For example, to build a portfolio that will provide sufficient income for you to live on in retirement, you may need the long-term growth that will come from riskier investments like stocks. Using technology or working with a financial professional are ways to help you both identify how much risk you can tolerate and how much risk you will need to assume in your portfolios to meet your goals.
A common way to manage risk is to diversify – the whole notion of not “putting all your eggs in one basket.” You can, for example, own a mix of stocks and bonds. Bonds might not offer the same potential for higher gains, but their prices do not go up and down as much, so they can add some stability to a portfolio.
Still, no investment is truly “safe.” If you earn only 0.5% in a year when inflation is 1% or 2%, your money will lose purchasing power. The higher returns that stocks offer could keep your money growing faster than inflation. Owning a broad mix of investments can help you manage both principal risk and inflation risk.
One way to manage investment risk is to hedge. With investing, the term “hedging” basically means the same thing it does when we use it in everyday life. People often say, “I’m going to hedge my bets.” They mean they’re going to have a fallback plan if things do not go exactly as expected. It’s something we all do when we get in a car – we put on our seatbelts. You may be a cautious driver and don’t expect to get in an accident, but you’re opting to protect yourself in case you do.
As an investor, you may want to pursue the higher returns available from stocks, but you know stocks are risky and their prices can go down. You can hedge your investments by diversifying and also owning bonds, as an example. Bonds may not offer the same potential for high returns that stocks do, but their prices also do not fluctuate as much. Owning bonds would be an effective hedge to lower the overall risk of your portfolio.
Hedging strategies can become quite sophisticated. For example, investors may deploy complex products like derivatives or options. Options, at their most simple definition, are an agreements with another investor that they will have to buy the investment from you if it increases or declines to a certain price within a specified period.
Today, a number of investment firms offer hedged equity strategies. These strategies may invest in stocks to pursue their long-term growth potential, but they have built-in techniques, like using options or diversifying into other asset classes that provide some risk protection. With these strategies, investors can fully participate in rising stock markets, while aiming to limit the losses they would otherwise incur during downturns.
As in life, with investing it can serve your interests to consider all your options for hedging your bets.
When you initiate an investment, you always hope for the best. You expect your individual stocks or bonds or any funds you own will appreciate in value. With financial investments, though, you know there is the possibility that they may not.
There are various ways you can protect your portfolio. Different portfolio protection strategies can help you offset the impact of adverse circumstances, like an economic downturn or a big drop in the stock market. The most widely used portfolio protection strategy is diversification. You own a mix of investments so that you’re not too negatively affected by any significant events that impact any one market, like U.S. stock, U.S. bond, or foreign markets.
Adding bonds to your portfolio, for example, will offer some protection when the stock market goes through a bad stretch of declines. Similarly, owning stocks will help you lessen the losses that occur when interest rates go up and bond prices, in response, go down.
Another portfolio protection strategy is a more nuanced approach to diversification. You can look to own different categories of investments that are “uncorrelated.” Correlation is a measure of how closely the returns on different types of investments will track each other. Commodities (a basic good used in commerce) like gold have negative correlations with stocks. That means their prices move in opposite directions. When stocks are down, gold prices go up and vice versa. For that reason, gold and other commodities may be considered for diversification.
As you look to minimize risk in your portfolio, you will want to consider all the ways you can gain portfolio protection.
Real Estate Investing
You can invest in real estate without having to take on the responsibilities of being a landlord. Real Estate Investment Trusts (REITs) are one of the commonly used ways for investors to participate in the real estate market. Basically, REITs are like mutual funds, but instead of owning a pool of stocks or bonds, they invest in physical properties like apartment buildings.
Investing in real estate offers two potential benefits for investors. First, they provide current income because tenants pay rent. Those rent payments are generally predictable and dependable given that tenants enter yearly leases and people need a place to stay no matter what is going on in the economy. Real estate are also good diversifiers because different factors affect real estate values – like local property tax rates and the rental unit occupancy rates in a town. That is quite different from the circumstances that influence stocks and bonds.
Within the real estate market, there are also opportunities for variety. REITs don’t just own apartment buildings. There are some that own commercial and industrial spaces, like malls and office buildings, or even land with tenants like cell tower companies. Since different factors influence each of these markets, you can further diversify your portfolio by owning a variety of REITs.
Investing in real estate is a great way to pursue additional income and diversification without ever having to worry about getting a call in the middle of the night to fix a pipe or squeaky door.