4 Methods of Managing Risk

4 Methods of Managing Risk
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About five years ago, I outlined the types of risks investors should consider (and mitigate) when pursuing their financial objectives. While most people understand “market risk” – the potential decrease in their stock portfolio value – many don’t appreciate that all investments, even conservative ones, carry some type of risk.

 

As we all continue hearing about “uncertain” and “unprecedented” times, it’s important to consider risk-mitigation strategies of all types – both for the value of your investments and for your own peace of mind. Here are some tips I offered in that original post – advice that was sound five years ago and shows no signs of going out of style.

  • Situation-Specific Planning: If you are closing in on retirement and you will be living off your investments, you could reconfigure your portfolio to reduce portfolio volatility while also maintaining some growth potential for a long lifetime. Have a balanced allocation of stocks, bonds, cash, real estate, and so forth. Or have separate accounts based on various time periods and manage each account according to its time period; near–term in conservative savings and long-term accounts in more aggressive investments.

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  • Don’t Bet the Swings: Because we can’t predict market movements, you could take advantage of the movements by averaging down in your investments, thereby exploiting market volatility. When averaging down, normal stock market drops stop being a risk and start being an opportunity to buy more shares. You actually need and want stock market declines.

  • Stay Balanced: You could rebalance your portfolio’s investments when individual holdings get over or under weight. Rebalancing to maintain a specific portfolio allocation forces you to buy low and sell high, which enhances your value over time. Rebalance when values get 10% to 20% outside your portfolio allocation ranges.

  • One Goal, Many Tools: Vary your holdings so you don’t hold all the same type of investments. An income-focused portfolio, for instance, may have bonds, CDs, preferred stocks, convertible bonds, insurance annuities, floating-rate loans, high-yield bonds, international bonds, closed-end funds, mutual funds, municipal bonds, or rental properties you own. A growth-focused portfolio could include stocks, real estate investment trusts (REITs), mutual funds (indexed or managed), exchange traded funds (ETFs), commodities, private money managers, variable annuities, property ownership, business partnerships, and so on.

 

For more financial advice, check out MOAA’s Finance page for the latest news, access to financial calculators, member-only publications, and much more.

 

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About the Author

Lt. Col. Shane Ostrom, USAF (Ret), CFP®
Lt. Col. Shane Ostrom, USAF (Ret), CFP®

Ostrom retired from the Air Force in 2000 and joined the MOAA team in 2006. His responsibilities include researching and answering member inquiries regarding military benefits, health care, survivor issues, and financial concerns.