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”.

Sounds easy right?

In hindsight, it’s always clear to say where you should have bought and sold to make those perfectly timed executions or asset allocation shifts.  However, in reality the uncertainty of market dynamics make it much trickier to assume greater risk on the upside while hedging your exposure when the market is falling.

October is a perfect study in how quickly stocks can fake you out.  The SPDR S&P 500 ETF (SPY) dropped more than 10% from high to low and erased all of its gains of the year in the course of a month.  It then subsequently made up all those returns and blasted off to new all-time highs in a three week time span.  Those that sold on the way down and didn’t subsequently get back in were left in the dust on a relative basis as a result of their risk adverse approach.

While I am a big fan of managing risk in a portfolio, there is always a trade off when you sell an investment that it could subsequently turn and rebound on you.  That is why it is imperative you have a disciplined approach to get you back into the market at a predetermined level if you do decide to sell.

Along those same lines, ETFs offer the ability to structure your asset allocation to take advantage of high beta or low volatility stocks within the context of your risk parameters.

If you desire exposure to companies showing relative strength or momentum characteristics you may be drawn to funds such as the iShares MSCI USA Momentum Factor ETF (MTUM) or Powershares S&P 500 High Beta Portfolio(SPHB). Both ETFs use performance screening methodology to select stocks with a higher sensitivity to the market’s machinations. The goal of these strategies is to provide greater upside potential, which may also result in leadership on the downside as well. That’s the tradeoff you assume when selecting a more performance-driven index.

On the flip side, seeking lower volatility investments such as the iShares MSCI U.S. Minimum Volatility ETF (USMV) will allow you to keep correlation with stocks in a more conservative wrapper. This ETF seeks to minimize peaks and valleys in your portfolio by selecting stocks with fewer price fluctuations. A more reserved ETF of this nature may ultimately lag its peers on the way higher because it is focused on minimizing downside risk.

The bottom line is that before you buy or sell any investment, ensure that you are doing so for the right reasons and doing so with a comprehensive game plan in mind. This will ensure that your portfolio is in line with your risk tolerance and objectives as well as help remove emotional triggers from your decision making process.