Wouldn’t it be great if there was a fail-proof way to reduce risk in your retirement portfolio?
Any investment ad worth its weight in gold has a disclaimer, “All investments are subject to risk.” That is because risk is the operative term when it comes to investing. In theory, the higher the risk, the higher the potential reward. For many people, though, what’s most important is not profits, but lowering the risk in their portfolios to make sure their nest egg stays intact.
Diversification: Your path to steadier gains
Diversifying your investments helps reduce risk in your portfolio, though of course it won’t eliminate it. If you own stock in just one company, and that company loses value, you could lose your entire investment. By investing in two companies, you’ve reduced that risk. By investing in a mutual fund or Exchange Traded Fund (ETF) that holds stock in hundreds of companies, your potential loss as a result of one specific company failing is reduced.
Diversify into different types of assets like stocks, bonds, and mutual funds. If you own a variety of assets, one type of asset performing poorly could be offset by another rising in price. One common way to reduce risk is purchasing bonds.
Adding steady income to your portfolio with bonds
A bond is a loan to a government or company that generates interest. You’ll get interest payments over time and when the bond matures you’ll receive your initial investment back. Like any loan, there is a risk that the borrower will default, but you can estimate that chance by using the bond’s credit rating. As long as the company doesn’t default, the bond will provide a relatively stable income. Consider diversifying your bond holdings, just like your stock holdings, to reduce your risk further.
If you want to reduce risk in your retirement portfolio, learn about income producing investments. Watch a 9-minute video here.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published October 16, 2017. Updated August 2019.