In life, there are no guarantees, absolutes or certainties. Every decision you make comes with some level of risk. Unfortunately, the same remains true in the world of finance. It may seem grim and out of your control, but fortunately, there are strategies in place to help you minimize the level of financial risk you are taking as you build your portfolio and plan for retirement.
But before you can learn how to effectively manage it, you need to understand what financial risk really means.
Financial risk is the chance that an investment’s outcome or actual gain will be different than the expected outcome or return. In simpler terms, it means there’s a possibility that you could lose some or all of the money you’ve invested. This can happen for a multitude of reasons that are most likely out of your control. So what can you do to help minimize risk?
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When it comes to investing, there are two strategies you can take: offensive and defensive.
The ups and downs of offensive strategies
Offensive strategies are designed to grow your wealth and generate future income. Investors who take this approach typically invest in options, futures, margin trading and even cryptocurrency. These investments have the potential to bring quick and high returns, but they can also result in major losses that come just as quickly. That’s because these products are highly dependent on the volatile market. When the market is right, the returns are good. But when the market is bad, so are the returns.
Offensive investors are usually more experienced and have a high tolerance for risk. This means they’re prepared to handle a greater amount of loss than someone with a low-risk tolerance. Taking an offensive approach when building your portfolio could bring significant returns if things go right, but if they don’t, you could lose a sizable portion of your funds.
How defensive strategies lessen risk
Defensive investment strategies are the opposite. These strategies work to mitigate that risk by safeguarding your portfolio against market losses. They prioritize seeking safety over growth.
Defensive investors purchase products like blue-chip stocks and short-maturity bonds while maintaining a diverse portfolio. These products allow you to accumulate interest while reducing the risk of loss in the event the market is headed in a downward spiral. But with increased protection, comes slower, steadier growth.
As you’re building and adjusting your portfolio, it’s best to have a good balance of offensive and defensive investment strategies. This allows you to prime your portfolio for growth, while also keeping a healthy dose of protection.
Using your age as a guide
A good rule of thumb is to use your age when determining how much of your liquid net worth should be fully protected from loss. For example, if you’re 55, you should have 55% of your funds protected from losses. This portion of your money still has a positive rate of return but is better protected against loss. The remaining 45% is subject to greater risk, but can also result in a higher rate of return. The right balance allows you to get returns while also shielding part of your money from market losses.
Life is unpredictable, and your portfolio should be built to handle the instability. If it isn’t, you leave yourself vulnerable, putting you at an increased risk for financial loss. To ensure your portfolio aligns with your financial goals, risk tolerance and market conditions, consider consulting with a financial adviser. They can help you make the right investments using a combination of offensive and defensive strategies while accounting for major life changes, market trends, tax considerations and asset performance.
These independent views and opinions are expressed are those of Joel Russo and are not necessarily the opinions of CoreCap Investments. Securities sold through CoreCap Investments, LLC, a registered broker-dealer and member FINRA/SIPC. This material is educational in nature and should not be deemed as a solicitation of any specific product or service. Past performance is not a guarantee of future results. All investments involve risks, including loss of principal. To determine which investments may be appropriate for you, consult with your financial advisor.
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