When and How to De-Risk Your Investment Portfolio

When it comes to financial planning, protection and preservation of wealth are of the
utmost importance; however, different phases in the saving and investing process, as
well as highly volatile market conditions like we are seeing with the Coronavirus, call for
different ways and means of managing market risk.

The Accumulation Phase

This is the period in one’s life where they are
actively saving to meet a major life goal, generally
retirement. Other goals include buying a second
home, investing more in their business, or even
paying for their child’s college tuition.

The Preservation Phase

This phase involves preparing for the transition
from accumulation to distribution. Naturally, since
invested funds will be needed sooner rather than
later at this juncture, preservation will be
paramount. This generally involves reducing the
amount of risk exposure in your investments.

The Distribution Phase

This is the period when your investments should
have the least exposure to risk as you will be relying
on them to fund your goals. Of course, outpacing
inflation and seeing some moderate returns are
ideal, but for the most part, risk should be kept to a
minimum depending on your situation.

When to Begin De-Risking
The closer you approach your long-term goals, the more important it is to preserve the
wealth you have accumulated through “de-risking.” The logic is relatively simple: the
shorter your timeline to meet your goal, the less risk you can take that equity markets
will fall and severely deplete the value of your portfolio. As you move through the
above phases, you and your advisor can begin the process of building a more
conservative allocation.

Another instance where you and your advisor may take steps to de-risk your portfolio
are in extended periods of market volatility. The longer the volatility lasts, the more
aggressive adjustments you may choose to make with your investments. Of course, the
key is not to pull out of the market completely, but simply to re-align your portfolio’s
risk level with your own personal timeline and tolerance.

4 Ways to De-Risk Your Portfolio
While no single approach will work for every investor, here are a few popular
approaches to de-risking one’s portfolio.

1) Re-Balance in a Timely Manner: Over time in thriving markets, it is not unusual for
stock allocations to grow a little too high. When a market correction hits, though,
a portfolio over-weighted in equities can suffer a severe blow. This allocation
leaves investors incredibly vulnerable when they might not be able to handle it.
Re-balancing keeps the scales balanced in a way that limits your exposure to risk.

2) Diversity into Bonds: On a scale of relative risk, bonds are a more conservative choice than
equities. Of course, they generally do not offer the same high returns, but when
preservation is concerned, a more conservative approach trumps risk-dependent returns.

3) Keep Liquidity High: Should the markets significantly drop or temporarily close
down, keeping liquidity higher than usual can act as a safety net for emergencies.

4) Choose High-Quality Stocks: Seek to invest in higher-quality companies that show
less debt and superior cash flows. In volatile times, it’s the strong businesses that
can typically withstand market setbacks and bounce back rather quickly.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Next Steps
Many savvy investors and advisors are taking the time now in these uncertain times to
rebalance their own portfolios. Depending on the complexity of your assets, this could
take some time and calculated thought to get right so we encourage you to act right
away.

While no one is sure if 2020 will bring a bear market, it is always best to prepare for the
unexpected. Your financial health and your family depend on it.
Are you unsure your portfolio is positioned to handle more volatility due to COVID-19
uncertainty?

We are here to help. Simply schedule a call or send us an email and we will
take a look at your current allocation and timeline to discuss your options.

Be safe. Be well. Be inside.