Once You Have A Plan, You Can Develop A Strategy:

Last week I suggested that if you really want to achieve your personal and family goals, that you had to have a plan.

At High Rock Capital Management, before we even begin to discuss your portfolio strategy, it is essential to understand what the expected results of that strategy are going to be.

So we prepare a "Wealth Forecast" to get a sense of the time frame (or time horizon) that will allow your goals to evolve and a sense of what growth rates are necessary to get you there.

Understanding the "pressure" that will be put on your assets to grow, allows us to understand what levels of "risk" will be necessary to accomplish the rates of growth that we need to achieve.

Furthermore, whether that level of risk is one that you are comfortable with.

What is risk?

Essentially, the inability to achieve your goals is the ultimate risk.

"Market Risk", on the other hand, relates to the ability of a certain set of investments to continue to grow (over time) and / or pay you for owning them.

Bonds for example, will pay you income at a certain rate of interest because you are loaning money to the bond issuer:

Therefore there are 2 important elements:

1. The ability of the issuer to pay the set interest until maturity
2. The ability to repay the principal upon maturity

When the "quality" of a bond is rated, it is based on those 2 key issues.

The higher the quality of the bond, the less risk of a default of expected payment.

However, higher quality bonds (such as those issued by the US Treasury or The Government of Canada), usually will pay less interest.

If you were not tolerant of any risk and only owned these high grade bonds, at the moment a basket of these bonds would give you an annualized return of approx. 2.6%.

Fully taxed as income, this would give you a net return (after tax, depending of your marginal tax rate) of approx. 1.6%.

If inflation is running at 2%, your aversion to risk will be costing you approx. .4% each year.

With this low (0) level of risk, your money will not be growing and if your goals are to achieve growth, your lack of "market risk" will actually, in itself, be increasing the risk of not reaching your goals.

So, basically, if you wish to get growth above the rate of inflation, you are going to have to take some "market risk".

How much ?

More tomorrow.