by Salman Ahmed

There I was standing in a department store with a different shoe on each foot. On the left, a comfortable dress shoe with a leather sole, which could last a lifetime if I resoled it every few years. On the right, an equally comfortable shoe, but with a rubber sole. I do live in Vancouver now after all! Though it won't last forever, the rubber sole made it lighter. Longevity vs. weight.

I had to think long and hard about it, but a decision was possible because I knew what I was giving up by choosing one shoe over the other. In investing, as in many professions, a clear verdict isn’t as easy to make.

For one, future outcomes are completely unknown in investing. For example, investors may consider the returns from stocks and bonds when deciding how much to own of each. The challenge is that the range of outcomes is wide and it will take years before you know if you were right.

The degree to which asset classes are related also complicates this trade-off. Keeping with my earlier example, bonds and cash would serve no place in a portfolio if investors considered only return potential. Our advice, however, has been to continue holding some fixed income investments because they tend to retain their value when stock prices fall. This is a trade-off between long-term return and preserving wealth.

Personal preferences matter too. My wife and I deal with this often when discussing our portfolios. We both consider falling short in retirement as the main risk, rather than volatility. Ashley also doesn’t like seeing a large drawdown in her portfolio. I, on the other hand, am expecting periodic drawdowns, and look at them as opportunities to buy while stocks are on sale. For that reason, she owns more in bonds than I do. So, despite having the same goals, she has given up some potential returns for certainty.

Whether we realize it or not we’ve all made trade-offs in our portfolios. This isn’t always obvious when browsing through the glossy marketing materials (click here to see our glossy materials). But understanding the implications of these decisions is important for us to know what to expect from our portfolios. If you’re unsure of the trade-offs you’ve made, give us a call (1-888-888-3147) and we'd be happy to walk through your portfolio with you.