3 Tips to Lower Your Portfolio Risk
How much do you think about the degree of risk in your portfolio? It's probably not enough. Here's how to think about risk and make portfolio adjustments to increase your odds of success.
- (opens in new tab)
- (opens in new tab)
- (opens in new tab)
- Newsletter sign up Newsletter

“What’s your risk tolerance?”
If you have an investment adviser, you’ve probably been asked to rate your risk tolerance from one to 10. Or maybe you’ve been questioned about what your actions will be during the next market crash: Will you panic and sell or buy more?
I don’t know many investors self-aware enough to admit they will indeed engage in panic selling. Likewise, most investors don’t sit around with a pile of cash waiting for a market crash — the last crash was in 2008, so those investors have been waiting a long time. Besides, what did you do during the depths of 2008? Regardless, you’re now 11 years older and in a different place. Evaluating risk tolerance with simple abstract questions is not useful.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Risk is powerful, but most of us are more accustomed to thinking about returns. Of course returns matter. But we can’t judge our returns without understanding the risk we have taken. Unfortunately, most people don’t have the slightest understanding of risk.
To Test Yourself, Flip a Coin
Here’s my test to start thinking about risk. Imagine all of your money stacked in bills on the desk in front of you. Now you are now looking at the largest stack of bills you have ever seen. We will play a game to determine how your money does over the next 12 months. Your job is to choose between picking up one of two coins: a nickel and a quarter.
If you choose the nickel, go ahead and flip it in the air. If it lands on heads you will be up 5%. However you will be down 5% if it lands on tails.
The stakes change if you choose the quarter. If it lands on heads, you will be up an impressive 25%. And tails? Well, you’ll be down 25%.
With all of your money on the line, which coin do you pick up? And more importantly, what does this tell us?
If you chose the nickel you are indicating that at this point in life, risk is more important to you than returns. You are in a good financial position, and you don’t want to blow it. If you are like most people, you can likely tell me your returns year to date. But if I ask you, “What is your risk?” You don’t have the foggiest idea.
If you place $100 in your bank account you will likely have between $100 and $103 a year from now. Money in the bank is low risk with a narrow range of outcomes. But if you place $100 in the S&P 500, a year from now it’s likely you’ll have between $65 and $150. U.S. stocks are much riskier than your local bank.
Risk is best understood as your range of outcomes. You cannot choose your future returns. But you can position your portfolio for a narrower range of outcomes. You can choose the nickel, the quarter or maybe a dime.
Practical Ways to Diversify Your Portfolio Against Risk
A range of outcomes is a choice that we, as investors, make. If you care more about risk and have more than half of your money in U.S. equities, you can likely lower your risk and decrease your range of outcomes. How? Diversification. Diversification is the process of owning things that will behave differently from the rest of your assets. Here’s how:
- Increase your weighting in international and emerging market stocks. No one knows how these markets will perform going forward, but they are likely to behave differently from U.S. stocks. Try VEA (opens in new tab) for international stocks and VWO (opens in new tab) for emerging market stocks.
- Buy some international bonds, denominated in international currencies. Try BWX (opens in new tab) for this. If the U.S. dollar depreciates, these bonds may do well.
- Buy some gold and commodities, which have historically had low correlation to U.S. stocks. Try GLDM (opens in new tab) for gold and PDBC (opens in new tab) for commodities. Beware that many commodity ETFs will deliver a Schedule K-1 tax form at tax time. PDBC, however, avoids this.
It’s hard to predict the future. It is much easier to add a diverse set of assets to your portfolio. Above all, be prudent. Don’t go overboard, but do go forward. Proper diversification can reduce your risk and range of outcomes without impacting your expected return.
Randy Kurtz, RIA, CFP®, is a nationally recognized expert on risk. Challenging the financial industry's status quo for over a decade, Kurtz feels the standard Wall Street portfolio comes with far more risk than clients realize. He created a method of investing that aims to lower excess risk taken in client portfolios, without reducing expected return. His goal is to transform the industry by turning the client-adviser relationship from a return-centered conversation to a risk-centered one.
-
-
Need an Estate Planning Checkup? Now Is the Perfect Time
An appointment with your estate planning attorney can address any holes that have developed and ensure everything is in place.
By Jack R. Hales Jr., J.D. • Published
-
How to Create Retirement Income That’s Driven by Cash Flow
Using a combination of dividends and structured notes in your retirement portfolio can offer liquidity, income and risk mitigation.
By Kyle Hammerschmidt, Investment Adviser • Published
-
Need an Estate Planning Checkup? Now Is the Perfect Time
An appointment with your estate planning attorney can address any holes that have developed and ensure everything is in place.
By Jack R. Hales Jr., J.D. • Published
-
How to Create Retirement Income That’s Driven by Cash Flow
Using a combination of dividends and structured notes in your retirement portfolio can offer liquidity, income and risk mitigation.
By Kyle Hammerschmidt, Investment Adviser • Published
-
Gaining More Certainty in Your Retirement Income Plan
Relying on market performance to close the gap in your retirement income could let you down, but a CD ladder and fixed annuities could provide some certainty.
By Cole Czajkoski, Investment Adviser Representative • Published
-
Considering a 1031 Exchange? The Rules You Need to Know
Taxes are an inevitable part of investing in real estate. You can, however, defer or avoid paying capital gains taxes by following some simple rules of a 1031 exchange. Yes, you read that correctly!
By Daniel Goodwin • Published
-
Could ChatGPT and AI Change Delivery of Legal Services?
Two attorneys weigh in on whether artificial intelligence could become a legitimate (and trustworthy) way to get legal help in the future.
By H. Dennis Beaver, Esq. • Published
-
Financial Wellness Is Self-Care: 3 Steps to Help Improve Yours
Many people resolve in the new year to get healthier. Taking charge of your financial wellness can help improve your physical health by lowering your anxiety about money issues.
By Kara Duckworth, CFP®, CDFA® • Published
-
A Financial Review in Early 2023 Can Optimize Your Strategy
Look to build savings, reduce risk, minimize taxes and ensure a successful retirement by reviewing your budget, contributions, allocations and beneficiaries.
By Ken Nuss • Published
-
Want to Increase Income? Focusing on 5 Elements Can Help
There are multiple ways to generate income, but to make your money work for you, consider sustainability, maximizing, automation, reinvestment and tax efficiency.
By Jamie P. Hopkins, Esq., CFP, RICP • Published