In personal finance, risk management is generally thought of as deciding on a stock/bond/cash allocation in your investment portfolio. Think about your tolerance for risk, and then figure out how much money to put in investments that could lose. But you still need to think of more…
Consider the risk and return of your career when determining an asset allocation. Those who have job security (like tenured professors and government employees) may have steadier income streams than someone paid on commission or someone whose job might be cut due to a world pandemic. Those with less certain paychecks should consider safer portfolios.
However, just because you want to limit volatility doesn’t mean you shouldn’t hold any stocks. Stocks and their growth potential are important to maintain purchasing power as the cost of living increases. To spread out the risk, ask your financial advisor about exchange-traded funds, mutual funds, or managed accounts which can give you much greater diversification than just a hand-picked stock portfolio.
Generally, older investors are advised to limit risk (and potential for losses) in their portfolio while younger investors, armed with time on their side, can usually afford to take on more risk. However, today’s generation of 20-30 year old, who have much time on their side, as a whole, are reluctant to take on risk. These investors have experienced financial crisis after crisis in their adult life. Without the wisdom of experience, “long-term” is a particularly difficult concept to digest, and as such, these investors are especially likely to make investment decisions based on recent events. However, they may be limiting exposure to market volatility at the wrong time in their life.
Just like taking on too much risk is a bad choice, taking on too little risk could also be considered a poor decision. To learn more on reducing risk in your portfolio read: Profile-Financial.com/reduce-risk
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 March 11, 2012. Updated June 2020