Goldsmith
Mellon DeLosReyes, Inc.
Registered Investment
Adviser
We
manage peace of mind with your investment
"Serious investing is not buying one
single stock after another hoping to hit home runs. Serious investing is making
money on your investments by minimizing risk," Gilbert M. De Los Reyes, Chairman
Investing By Minimizing Risk - Often Asked
Questions
Q: What is wrong with buying individual stocks
if you have done due diligence on them?
A: There is nothing wrong with it, if you don't mind disproportionate
risk. Let me explain in simplest terms. If you buy one stock, on the average, you
have a fifty-fifty chance of making money. If you buy two stocks you improve your chances.
You need to buy a lot of individual stocks to achieve sufficient diversification and
reduce risk exposure.
Q: What would you advise an investor?
A: First, you have to identify your investment objective, your risk
tolerance, and your investment time horizon, or how long you intend to keep the money
invested without withdrawing it. Then you build a well-diversified portfolio that
conforms to those parameters.
Q: Is there such a thing as riskless investing?
A: Is there such a thing as riskless living? To answer your question, no. Even
the U.S.Treasury Bill, which is referred to in the investment management world as a
riskless asset, is exposed to some risks, even if you hold it to maturity. Inflation risk,
for one.
Q: Can you eliminate risk if you diversify?
A: There are two kinds of risk in investing. Market Risk, which is influenced by
economic conditions, such as inflation rate, interest rate, exchange rate, employment rate
and all those other macroeconomic factors. Then, there is the Firm-Specific Risk, which is
influenced by management effectiveness, production capability, research and development,
and other factors that affect only a particular firm or security. You can eliminate
Firm-Specific Risk by diversification. However, you can not eliminate Market Risk.
Q: How do you diversify to eliminate
Firm-Specific Risk?
A: The process, as you know, is called Asset Allocation. In a research
study of pension plan performance conducted by Brinson, Hood and Beebower in 1986 and
updated in 1991, it was concluded that asset allocation accounted for 92% of the
investment results, 5% from security selection, and 3% from tactical or market timing.
Technically, the asset allocation process involves some statistical calculations of
variance, covariance, standard deviation and correlation coefficient. But in layman's
terms. it simply combines different asset classes, such as stocks, bonds, money-market,
CD's, precious metals, real estate, both domestic and foreign investments in proportions
that would either increase total return and corresponding risk, or reduce both, depending
on the risk-tolerance of the investor. Let me quote a Wall Street dictum. "The higher
the expected return on your investment, the higher the risk." With asset allocation
you would have eliminated the Firm-Specific Risk. Now you are left with the Market Risk,
and you have to look for your comfort level among various combinations of assets with
degrees of lower return with lower market risk, or higher returns with higher market risk.
.
Q: Is it worth going through this complicated
process to manage your investment?
A: It is really not that complicated for clients. We do all the work,
including writing the investor's investment policy statement. which formalizes the
investment objectives, risk-tolerance, and performance evaluation guidelines. Then we do
an asset allocation. Once that is done, we handle the execution of the plan by helping the
client search out and select the right investment managers, or if the client prefers, help
him select the individual investment vehicles to fit into the asset allocation guideline.
We then monitor the performance of the portfolio and recommend adjustments, if necessary.
Is it worth it? Wouldn't you like to sleep better at night?
Q: Can you apply the asset allocation
approach to pension and retirement plans as well as individual investing?
A: Yes, and firms or individuals can call us anytime for a free consultation on
their investments.
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