Balancing your need for higher returns with your tolerance for risk
There is a well-documented relationship between risk and return: To earn higher returns, you must take more risk. “Risk,” in the context of investing, refers to the chance that an asset will lose value. You take risk to earn higher returns when you invest in the stock market. Stocks produce higher returns than bonds, CDs, or other low-risk alternatives most of the time. On the other hand, stocks may also produce negative rates of return when the securities markets decline in value.
Our role at Lucas Capital Management is to balance your need for higher returns with your tolerance for risk. The higher your risk tolerance, the higher your allocations in the stock and bond markets. The lower your risk tolerance, the lower your allocations in the stock market, and the more volatile part of the bond market (lower-quality ratings, longer maturities).
At Lucas Capital Management, we take our risk management role very seriously. The appropriate balance of risk and return is different for each of our clients and varies based on their stage of life. Many of our clients are satisfied with lower, more consistent rates of return to avoid the risk of losing money in market downturns.
We believe each Lucas Capital Management client has three characteristics that impact the amount of risk we take when we invest their assets in the securities markets:
- Stated tolerance for risk
- Capacity to take risk
- Willingness to take risk
Our first step is to establish your tolerance for risk. After a combined 60 years of portfolio management experience, we can tell you this description of your tolerance for risk is not as simple as Low, Medium, or High.
We also have to balance your capacity to take risk versus your willingness to take risk. For example, you may have a higher capacity for risk when you have more income and assets than you will ever need. However, you are not willing to expose your assets to substantial down years.
It is our role to balance these competing risk characteristics.
That is why we integrate risk management into all our financial planning and investment management processes. For example:
- We discuss your current and future tolerance for risk
- We factor in risk capacity and willingness
- We consider all aspects of your financial life:
- Amounts of assets in risk-managed portfolios at Lucas Capital Management
- Financial assets that are held at other firms
- 401(k) account balances
- Other assets: Real estate, company stock
- We build a diversified portfolio that is based on your current tolerance
- We stress-test your portfolio and review the outcomes with you
- We review your tolerance for risk annually
- We rebalance portfolios to maintain desired risk levels