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?
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.
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.
Related Content
-
Visa Is the Worst Dow Stock Wednesday. Here's WhyVisa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
-
Another Analyst Moves to the Sidelines on Tesla Stock After EarningsTesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
-
Confused by Annuities? Making Sense of the Different TypesMany investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
-
Talkin' 'Bout My Generational Wealth: Baby BoomersWith retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
-
How to Avoid a Big Hassle if Your Financed Car Gets WreckedHow an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
-
Estate Planning Strategies to Consider as Election NearsAre big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
-
How to Get Your Money's Worth From Your Financial AdviserA good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
-
Think of Prenups and Postnups as Financial Planning ToolsThese contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
-
Congratulations on Your Raise: Three Things to Do With ItWe're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
-
Check Off These Four Financial Tasks to Finish 2024 StrongThe new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
