Four great ways to minimize risk
A big part of what I do as a financial advisor, is managing and minimizing risk for clients. When the market is going gangbusters, like 1998 and recently, everyone can do well in stocks. Financial pro or not. That’s only one part of investing. The critical part is NOT LOSING as much money as the market during the eventual decline.
That’s where risk management comes in. There are many risks and many strategies to do this. Here are four that I use regularly.
INVEST IN MANY UNIQUE CATEGORIES
Examples of the danger of using only one asset category are strewn about the investment battlefield. Think again of 1998. Everyone from the bellboy to the CEO was talking of only one thing: tech stocks. Then what happened? (Insert balloon fizzle sound effect). The category got killed. We had a “forty year event.” Stocks were down for three years straight!
Diversify. Really, truly diversify into different categories like emerging market bonds, small-cap U.S. stocks, etc., etc.
USE MUTUAL FUNDS OVER INDIVIDUAL STOCKS
I use some individual stocks but only rarely. It’s not that I don’t like them. They just aren’t diverse by themselves. If you invest into eight categories using diverse mutual funds containing, for example, 200 different investments each, then you have 1,600 different investment positions.
Would you rather have 1,600 different assets or one individual stock? Let’s say the stock was Enron in late 2000. Which would you feel safer holding?
Odds are in your favor that a few thousand investments won’t go belly-up overnight like an individual stock or bond.
RE-BALANCE YOUR PORTFOLIO REGULARLY
Re-balancing your investments is easy. Just sell your gains and then reinvest into undervalued assets. Even look at the solid investments you have that have lost value. Yes, lost value. This could be where the bargains are.
This process is a systematic way to take emotion out of investing. Instead of falling in love with a favorite investment you take some money “off of the table.” You still hold a significant part of the original investment. Just sell the gains.
INVEST FOR HIGH INCOME
Even a retired investor, with no earned income, can take advantage of one of the best investment strategies out there: dollar-cost averaging (DCA). This is simply investing new money at regular times. It might be monthly, quarterly or even annually.
If you have a large income from your portfolio you’ll have regular, new money to invest when the markets have their inevitable drop. Your cash builds up then you look for bargains.