Risk taking is good for your portfolio . just don't overdo it

By Tim Suffish CFA, CPA Vice President, St. Germain Investments We're a conservative bunch at St. Germain. We've been in business for 74 years, managing our clients' assets in a conservative style for the "long term." The investment world is full of clich s, and we really do hate to use them, but so many of them can succinctly communicate a strategy in an understandable way. For example: Don't put all your eggs in one basket Slow and steady wins the race Better safe than sorry If it looks too good to be true, it probably is One overriding theme that can be gleaned from all of these sayings, is that risk is bad. Despite all that I've said, I'm actually here to let you know that risk is not bad. In fact, the addition of risky assets to a portfolio can lead to very good results. A little investing history For over 150 years (prior to 1992) the "Prudent Man Rule" was the governing investment principle for fiduciaries. Under the Prudent Man Rule each individual portfolio investment needed to be considered on its individual merits. There was no consideration for the greater context of how an investment may fit into the bigger picture of a diversified portfolio. So .. stock A is considered in isolation, stock B is considered in isolation, and so forth. In this world, risk was verboten. Risky assets were generally avoided as they could not stand up on their own under the scrutiny of the Prudent Man standard. As investment theory progressed in the 20th century, the concept of diversification and the consideration of an entire portfolio of assets took hold. In 1992 the Prudent Investor Act was adopted, allowing fiduciaries to look at the performance of an investment portfolio in total, rather than the individual components. Stripping out the investor-speak, this means that investments once considered too risky for consideration can now be included in a diversified portfolio. The overall risk/reward of the portfolio, not the individual stocks, is the main consideration. Prudence and the individual investor This principle of the portfolio carries lessons for the individual investor as well. That Chinese internet you were tempted to invest in .. it's ok; in small doses. The solar energy startup that you read about; give it a shot. After all, before the show came about, the term "Mad Money" referred to the portion of your portfolio dedicated to speculation. Despite my conservative nature, I do think it is ok to speculate in the risky stuff; provided you keep it to no more than 5 percent of your portfolio. The bottom line is that when looking at the big picture, a portfolio with a few "flyers" can still be considered "slow and steady" (which will win the race). So go ahead, take a risk. But keep a leash on it ! Column provided to PRIME by:St. Germain Investment Management; 1500 Main Street, Springfield, MA; Phone is 413-733-5111 or 1-800443-7624; web site: www.dgstgermain.com