Wealth Management Blog | WrapManager

4 Common Portfolio Risks and How to Avoid Them

Written by Michael J. O'Connor | July 1, 2014

A key to investing well is finding balance between opportunities for growth and the potential risks that come with them. You want to generate returns needed to meet your long-term goals while limiting the potential portfolio risks associated with downside volatility and other adverse events.1

Practically every investor faces the following four risks to their portfolio. While each risk can be addressed in specific ways, start with good planning with your financial advisor, regular updates to your investment plan and being properly diversified. Then move on to the more specific methods below.

Portfolio Declines Due to Market Volatility

To paraphrase Boston money manager Newfound Research, LLC, ‘investors don’t live in a world of “100 year averages.” Instead, they live in a world of 40 year investment horizons, where significant declines can permanently impair retirement portfolios as investors do not necessarily have ‘more time’ to make up from large losses.’2

  • Diversify Your Sources of Income
    Reducing the amount of income you withdraw from your investment portfolio during extended market downturns can help reduce the impact to your portfolio.

  • Consider Investing in a Tactical Money Manager Strategy
    Newfound is one such money manager, whose goal is to participate in rising markets while also seeking to limit capital losses when the market declines. Newfound's strategies are designed with the ability to move to 100% cash in an attempt to limit large losses.2

Outliving Your Money

According to the Social Security Administration, a man turning 65 today is expected to live to age 84, and a woman of the same age will reach 86 on average. About 25% of 65 year olds will live past age 90.3 For many, that means several years of pulling retirement income from your investments, which can increase the risk of outliving your savings.

  • Create a Retirement Income Strategy with your Financial Advisor
    This involves taking the time to map out your income needs throughout retirement, and then layer-on additional unforeseen/emergency expenses to create an income buffer.

  • Seek Out Income-Producing Money Manager Strategies
    Income-generating money manager strategies may help your portfolio produce additional income that can be used to cover expenses or be reinvested. Two such strategies to consider are the Federated Strategic Value Dividend strategy or the Newfound Risk Managed Income strategy.

Losing Purchasing Power Over Time

A recent study by JP Morgan shows that since 1985, inflation has increased at a faster pace for those aged 62 and older. The rising cost of health care plays a significant role in that, and for retirees it could mean increasing expenses over time. The risk here is spending down your savings at a faster pace than you anticipated.4

  • Make Sure Your Portfolio is Balanced for Growth and Income
    Factoring-in rising health care and other costs to your portfolio creates the need for a certain level of growth over time. As a result your investment plan may call for your portfolio to have a reasonable amount of equity exposure, for example. Your financial advisor can help you determine an appropriate level.

Life Changes Requiring Significant Changes to Your Investment Plan

Sometimes life hands us surprises, and sometimes those surprises result in unforeseen costs. Whether it’s the need for extensive medical care, helping out a relative or a friend, or losing a source of income due to circumstances you cannot control, the risk could affect your retirement income strategies.

  • Factor Unforeseen Expenses into Your Investment Plan
    Have your financial advisor show you how your investment plan would be affected long-term if you were met with a sizable expense a few years into retirement. This is a good way to test your investment plan to see if it can withstand setbacks.

  • Hold Cash Reserves
    Holding too much cash on the sidelines could mean forgoing growth, but it could make sense to hold a year or two’s worth of living expenses aside so that you do not need to withdraw from your portfolio when you have an unexpected need.

Use an Investment Plan to Help

One of our Wealth Managers can take a detailed look at your portfolio, while helping you assess each of the risks above. We can discuss ways you can adjust your portfolio to better position yourself against them. Call us at 1-800-541-7774 to have the conversation today, or answer a few brief questions here to get started on your investment plan.




By Michael J. O'Connor, CWS
®

Michael is a Certified Wealth Strategist and Wealth Manager at WrapManager, Inc.



Sources:

1 Wells Fargo

2 Newfound Research LLC

3 Social Security Administration

4 JP Morgan Asset Management

 

Strategy descriptions listed represent a brief outline of the portfolio’s objective. There is no guarantee that any manager or product will be successful in achieving the objective described. The strategy used by the money manager listed is not suitable for all investors. This material does not represent a personalized recommendation and does not reflect individual investor’s risk and return goals nor does it serve as the receipt of, or a substitute for, personalized advice from WrapManager, Inc. or any other investment professional.