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“To be persuasive we must be believable; to be believable we must be credible; to be credible we must be truthful.” -- Edward R. Murrow

Sorting through the Sunday paper I came across ad inserts for “back to school” supplies. Remember the three R’s, the basics of education; reading, ’riting and ’rithmatic? The investment world also has three R’s; risk, returns and rebalancing. Whether you’re building an investment portfolio or monitoring your existing holdings the three R’s are a wise place to start, especially in today’s market.

Risk

We’re in the midst of economic uncertainty and volatile oil prices ($145/barrel at the time of this writing). Know how much risk you can live with and make sure your portfolio reflects this. There have been some periods of relative calm recently that may have hinted at a less volatile market, but, clearly, volatility is still with us. No one can tell where the market is going next. Remember why you invested in stocks in the first place.

A big factor in risk is age and time-frame. What stage of life are you in and what are your short-term, mid-term and long-term goals and objectives? How do these influence your investment decisions?

Returns

Risk/return is a trade-off; potential return increases with an increase in risk. Low levels of uncertainty are associated with low potential returns. High levels of uncertainty are associated with high potential returns. Because of this it’s imperative for you to be aware of your risk tolerance levels. The goal is finding the right balance of risk/reward (return) for you.

Rebalancing

If the percentage of stock has increased in value in your portfolio and has outgrown your intended weighting it affects your risk tolerance and it may be time to rebalance. The reverse is also true if a position or a sector has declined in value. There is an impact on the risk/return relationship.

Hopefully you can see why your investment policy statement is so important; it keeps you focused and true to your stated investment objectives. Rebalancing gets you back to the intended investment mix by realigning the investment weightings. An example could be selling some stock to move it to cash or bonds.

Aesop’s fable, “The Boy Who Cried Wolf” taught us that warnings of catastrophe lose their punch when nothing of much consequence occurs. In a way, that’s what happened to predictions about the oil supply for decades – remember the oil crises of the 1970s? We were warned that the oil supply is finite, that it should be conserved, that developing countries would one day actually develop and their populations would place heavy demands on existing supplies and that prices would rise to unimaginable heights. Like teenagers with nagging parents, we paid little attention. But $4-plus gasoline is getting our attention.

The consensus is that it’s not going to “settle back down” this time, that increasing demand is here to stay and that modest short-term increases in supply, if possible, won’t accomplish much. Americans finally seem to have gotten the message. Driving is down. In April, Americans drove 1.4 billion miles fewer than in April 2007 – the sixth consecutive month of a year-by-year comparison decrease. Car manufacturers have cut back on truck and sport utility vehicle production; sales of hybrid’s and other gas-sipping cars are up while guzzlers can’t be given away. And there’s evidence that home buyers are choosing locations closer to work rather than absorbing the costs of a long commute.

A visit to the local grocery store educates us as to the impact that oil, weather and plain old supply and demand has on most all food items and everything we buy, not just corn. That ice cream had a long trip before it found its way into my freezer. The cream from the cow that was fed with grain irrigated by water provided by the farmer, the energy used to churn the ice cream, the refrigerated truck, and on and on it goes.

China recently raised its government-regulated gasoline and diesel prices by 16.7 percent (new cost is approximately $2.89 a gallon) and, guess what, angry motorists protested. But will price hikes to consumers in developing countries temporarily lower demand and slow worldwide price increases? What about the inflationary effects of all of this?

Perhaps only one thing is clear: for Americans, the days of cheap oil and gasoline are gone, and their costs are going to hit the family budget. For investors, these are unsettling times because of continuing market volatility, but also because future energy directions are unclear.

The times they are a changing, but there are suitable investments out there for those who take a long-term view. Remember the three R’s; risk, return, and rebalance. There’s a fourth “R” that I’d like to add to the list and that’s realistic.

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This article is provided by Darcie Guerin, Financial Advisor & Branch Manager, Raymond James & Associates, Inc. located at 606 Bald Eagle Drive, Suite 401, Marco Island, and Fla. 34145. If you have questions please contact Darcie Guerin via Email at Darcie.Guerin@RaymondJames.com. Phone (239)389-1041, toll free (866)-343-0882 or at www.RaymondJames.com/Darcie.