The concept of symmetry when it comes to risk is something that most investors overlook.  I have found that most people hone in on one aspect of an investment that looks attractive or dismal rather than taking a holistic approach to their analysis.

More speculative plays offer an attractive reward component, however they can also result in spectacular downside.  Conversely, conservative investments may not offer quick profits, but won’t lead to sleepless nights over double digit losses either. There is always a trade off on the risk versus reward scale that can significantly alter your end result.

Getting overly wrapped up in recent performance, dividend yields, or other narrow dimensions of an investment are likely to get you into trouble over time.  This is because your decisions will be based on greed or fear rather than selecting investments that work in harmony together to meet your individual needs.

I frequently run across this mistake with income investors that focus solely on yield rather than blending a quality mix of assets to balance out returns and diversify their exposure.  As a general rule it should be assumed, the higher the yield on an investment, the higher associated credit or business risk.

Holding large allocations to funds such as the iShares Mortgage Real Estate Capped ETF (REM), SPDR High Yield Corporate Bond ETF (JNK), and other credit or leverage heavy names can introduce your portfolio to higher than average volatility.  While the yields are attractive on a relative basis to an asset class such as Treasury bonds, risk dynamics will play a role in evening the playing field as interest rate and credit cycles evolve.

Another overlooked facet of successful portfolio management is managing expectations.  In my recent webinar, I detailed a conversation I had with a prospective client over who outlined the following parameters he desired for his accounts.

“If the market is up 20%, then I expect that you will meet or exceed those returns.  However, if the market is down 20%, then you should have significantly less losses on the downside”.