Risk: How to Prepare your Portfolio for a Potential Pullback


 
 
05:28 10/20/2018

With markets slipping, many investors want to know how to protect their portfolios.

While stomach-churning downturns are the nature of the market, sit tight. The last thing you ever want to do in a pullback is panic-sell.

Pointer No. 1 – Stress test your portfolio

“When stocks are at record highs, most investors get a false sense of their true risk tolerance, or ability to emotionally and financially deal with losses,” says USA Today. “The best way for investors to find out how big a market drop they handle is to envision how they would feel if the market tanked, says Susan Kaplan, president of Kaplan Financial Services.”

To stress test your portfolio, have a discussion with your financial advisor.

There are two key questions to ask. First, can your portfolio weather a possible downturn if the market were to sink with your current allocation. And two, if the market were to plummet, can I still attain my financial goals.

Any financial professional should be able to provide guidance on both questions.

If not, maybe you need a new advisor.

Pointer No. 2 – Make sure you’re well diversified

“Putting all your retirement money into a single stock or one type of investment vehicle is considered unwise. If that investment goes south, you could lose everything. In general, financial experts recommend buying a mix of assets, or diversifying, because it’s nearly impossible to predict when a single stock will take off … or fail,” says CBS News.

A diversified portfolio can include large and small companies, different industries or sectors, U.S. and overseas securities, Bonds as well as cash.

Pointer No. 3 – Rebalance your Portfolio

“Rebalancing is the painful process of selling assets that have appreciated and buying ones that have fallen in value. It forces investors to sell high and buy low,” says CNBC. “You don’t have to rebalance after every market gyration. Vanguard found that investors who wait to rebalance until their portfolios were 10 percentage points off target produced better long-term results than shifting the investment mix more often.”

And, according to the Bank of America:

“Consistently rebalancing your portfolio can help protect you from trading based on emotions,” says Liersch. Rebalancing is about keeping your eye on the big picture — your goals, your tolerance for risk, your investment time horizon and your liquidity needs — and not being seduced or scared off by the swings of the financial markets.


This article has been provided by a Chasing Markets contributor. All content submitted by this author represent their personal opinions, and should be considered as such for entertainment purpose only. All opinions expressed are those of the writer, and may not necessarily represent fact, opinions, or bias of Chasing Markets.
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