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As expected, markets have been more volatile than normal so far this year. When this happens, investors tend to want to adjust their portfolios to “get rid of the risk.” But what does that mean?
While changes to a more aggressive portfolio may reduce equity market risk, many times we are trading one risk for another when we make those changes.
Today, let’s explore some of the different types of risk investors face in their portfolios so that we can make educated decisions when looking to reduce risk.
Fixed income has its own set of risks, which are often overlooked by investors when they want to switch from more aggressive portfolios. Investors all too often mistake fixed income (bonds) for safety. The reality is that while fixed income investments can be less volatile than equities, they actually have different types of risk that can affect them.
Clearly there are an awful lot of risks that investors can face other than just the risk of volatility in the stock markets. Understanding these risks can help make you a better investor.
So, if you really want to “get rid of the risk,” what should you do? There is no true way to eliminate risk, but you can certainly reduce it. Many non-investors think “safety” means parking money in a checking and savings account and “eliminating” any type of investment risk. However, even those accounts are subject to risk. As noted above, inflation is sky high at the moment and may continue to be for some time. Inflation reduces your buying power, therefore subjecting you to “risk.”
The only way to reduce risk would be to diversify and have an established plan for different types of investing environments. Having a well-thought-out plan can go a long way in ensuring financial success when uncertainly arises.
President and Founder, Reich Asset Management, LLC
T. Eric Reich, President of Reich Asset Management, LLC, is a Certified Financial Planner™ professional, holds his Certified Investment Management Analyst certification, and holds Chartered Life Underwriter® and Chartered Financial Consultant® designations.
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