With a potential recession looming, it may seem favorable to remain in cash to hedge against any drastic market downturns. However, with inflation creating less bang for the buck when it comes to the U.S. dollar, it is crucial to keep your portfolio active in order to preserve capital.
To help you allocate successfully in today’s volatile environment, CFO.com spoke with Daniel Tolomay, chief investment officer at Trust Company of the South, for insight on how to effectively gauge risk versus reward in investments.
“Risk and return are directly related,” Tolomay says. According to Tolomay, being able to tolerate risk is of the utmost importance for investors. He tells the publication that remaining patient, not getting caught up in day-to-day market fluctuations and being able to strategize with both short- and long-term goals in mind can also help investors take the necessary risks.
“Risk tolerance has two dimensions: the ability to bear risk and the willingness to bear risk,” explains Tolomay. “The goal is to align them so that enough risk is taken to meet the goals, but that not too much risk is introduced where the plan could be abandoned under duress.”
Despite the benefits that can come from a certain level of risk when investing, many high-net-worth individuals and institutions are still searching for places to park their cash. For these investors, they may want to consider allocating toward conservative investments such as money market funds.
“Money market funds are great for cash needs where timing is unknown,” says Tolomay. “They provide a stable value, daily liquidity, and a floating yield that should rise as the Fed continues to hike.”
Regardless of the pros and cons of each approach, Tolomay believes that success can often be found for investors who are able to find a middle ground. “We think of risk as a spectrum with purchasing power risk at one end and market risk at the other. Being too conservative with cash can mean losing purchasing power to inflation. Getting too aggressive can lead to damaging losses,” he concludes.