Investment choices can overwhelm consumers, especially those who are risk-averse. But understanding basic best practices can help you choose a safe direction: Take stock of your portfolio, avoid common mistakes, and know the pros and cons of different investments to prepare for your future retirement. In this Q&A, Kevin Riley, associate professor of business at the College of the Ozarks’ Plaster School of Business in Missouri, provides insights into these and other tips.
For risk-averse investors, is it necessity to include stocks and other risky investments to reach financial goals?
Clearly, stocks have outperformed most asset classes over time and are necessary in most portfolios to achieve adequate returns to reach financial goals, for example to help cover inflation. This would include accepting certain levels of risk. I would not necessarily classify all stock portfolios as “risky”– stocks carry more risks than short-term money funds and bonds. However, it may be necessary to accept some risk if you have time to receive long-term returns on stock portfolios.
In your opinion, do individual investors accurately assess the importance of accumulating retirement assets?
I think it is very difficult for young people to focus on the long term, partly because of the responsibility of covering obligations created by attending college, starting a new job and perhaps dealing with a young family. Retirement assets are the easiest financial goal to postpone because of the lack of immediacy.
What is the single biggest mistake you see individual investors make?
From what I have been able to observe, it is a lack of discipline. Once someone commits to an investment program and sees their original investment grow 5 percent from $2,000 to $2,100, it is not that impressive. They may instead think, “Why not spend that on a vacation?” But the investor should not quit on the plan and take a long-term view of letting the power of compounding returns over time enable them to reach their financial goals.
What are the pros and cons of including international investments in an investor’s portfolio?
The primary advantage is to add diversification to your financial portfolio. There are many times when international investments outperform domestic stocks. Picking individual stocks is quite risky. However, under the umbrella of an international or global mutual fund, you should be able to get adequate diversification and professional management. The risks of international investments include higher volatility, currency risk and basic issues of political stability.
What are the pros and cons of including real estate investments in an investor’s portfolio?
Real estate is a very complex category. Investing through a real estate investment trust (REIT) is a relatively safe method of exposing yourself to real estate without the inherent risks of actually owning property. As can be seen with the performance of real estate the last few years, this asset category carries risk. A limited amount of investment in this category could strengthen your portfolio.
What role should alternative investments play in an individual investor’s portfolio, and what are the pros and cons?
I would leave this category to sophisticated investors or perhaps at the recommendation of a Certified Financial Planner. If you have a significant portfolio already, there may be a place for these investments. However, you must accept volatile returns and perhaps significant losses. Even though some of these categories have done extremely well recently, with great reward comes great risk.
Special thanks to Kevin Riley, associate professor of business at the College of the Ozarks’ Plaster School of Business in Missouri, for participating in this interview.