Understanding And Mitigating Investment Risks

TruePoint Capital

The typical investor is afraid to try new things and investments because of their perceptions of risk and the perception that non-traditional assets are riskier than traditional ones.

Investors are conditioned to stick to what they know because they’ve been told throughout their lives that traditional investments like stocks, mutual funds, ETFs, and 401(k)s are safe investments. But why do ultra-wealthy individuals and institutional investors gravitate towards alternative assets when everyone else tells you those assets are risky?

The truth is certain cash-flowing alternative assets like investments in private companies (i.e., private equity) and commercial real estate (CRE) offer above-market returns at reduced risk. This goes against the traditional risk-reward spectrum, where reward correlates to risk. The higher the risk, the higher the reward, and the lower the risk, the lower the reward.

Based on the traditional view of risk-reward, the common misperception about investing is that you can not achieve high returns without high risk.

But what if it was possible to achieve higher returns at less risk? And what if I told you that based on this alternative risk-reward paradigm, it is possible to mitigate risks further through specific strategic actions without sacrificing returns? You may not believe it at first, but it is possible to arrive at these conclusions. It will just take a paradigm shift to recognize these possibilities and take advantage of them.

The first step to adjusting your risk paradigm in your investments is to assess your current understanding of risk and your level of risk tolerance. Before adjusting your investing paradigm and accepting the possibility of achieving higher returns at less risk, you need to determine whether you have the risk tolerance to go out on a limb to try something new – to invest in an alternative to Wall Street.

Once you determine it’s possible to achieve higher returns at reduced risk, you then have to ask yourself if you’re willing to do the things that will help reduce and mitigate risks in your relationship.

Ask yourself whether you’re willing to implement the following three protocols for reducing risk:

Are You Willing To Think Long-Term?

Investing in long-term cash-flowing assets has long been an effective strategy by the ultra-wealthy for mitigating risks. Long-term assets are insulated from Wall Street volatility because they are illiquid. In addition, by locking up assets long-term, you give your investments time to mature and iron out any short-term bumps in the road.

Long-term assets also allow investors to benefit from the power of compounding returns. Cash-flowing assets allow for the reinvestment and compounding of profits that, when combined with underlying appreciation, generate returns impossible with traditional assets that rely only on appreciation for gains.

Will You Consider Diversification Strategies?

Diversification is an effective way to mitigate risk, but there’s a right and wrong way to do it. Diversification on Wall Street reduces risk but also dilutes returns. Diversifying with a mix of long-term cash-flowing assets effectively reduces risk without sacrificing returns.

With long-term assets like commercial real estate and income-producing businesses, investors can diversify across geographic markets, asset segments, return types, and investment strategies. The right mix of properties will ensure uninterrupted cash flow that can be compounded to provide uninterrupted cash flow – essential for achieving financial independence and peace of mind.

Are You Willing To Recalibrate Your Portfolio?

Periodic portfolio assessments and the willingness to recalibrate your portfolio are important for allocating to promising assets that become long-term trends. For example, post-Great Recession, multifamily gained momentum as demand far exceeded supply as former homeowners downsized to apartments and other multifamily housing in the face of rising unemployment and housing affordability.

What started as a trend is now the norm as multifamily demand continues to outpace supply. Recalibration of portfolios to account for market changes like the one involving multifamily is effective for mitigating risks long-term.

If your current risk tolerance keeps you from considering alternative investments because you’ve been told they’re high-risk, then maybe it’s time to assess your current risk perceptions and tolerances and consider a recalibration.

Don’t let everyone else tell you it’s impossible to achieve above-market returns at reduced risk.

CRE has proven that it’s not only possible but that investors can take proactive steps to augment risk mitigation. They must be willing to take a leap of faith to implement those measures.

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