How to Manage Risks to Your Portfolio in an Uncertain Economy
In addition to volatility of individual securities, you also face risks related to your life span, market changes, and more. The following table explains how to minimize risks.
|Longevity risk||The risk you’ll outlive your money||Make sure you have a sensible withdrawal rate. Know what you need for big purchases and for basic expenses. Consider a no-load, low-cost immediate annuity to guarantee an inflation-adjusted lifetime stream of income, at least sufficient to cover basic needs that Social Security and any pension benefits don’t cover.|
|Liquidity risk||The risk that you won’t have the cash on hand when you need it, forcing you to sell assets in a down market||Assign chunks of your money to each major goal. Plan to have more accessible liquid assets, such as short-term bonds and cash, in those accounts as the time approaches.|
|Inflation risk||The risk inflation will outpace the return on your investments, reducing your purchasing power||Long-term inflation is close to 4%; underestimating the effect of price increases can put your portfolio and income stream at risk. Use a realistic inflation factor in your planning. Make sure you have enough equity in your mix to grow your long-term money faster than inflation.|
|Market risk||The risk that stock and bond markets as a whole will fall||Get a mix of stocks, bonds, and cash that make sense for your risk tolerance and time horizon.|
|Manager risk||The risk that you’ll pick the wrong money manager, your manager will leave, or your actively managed mutual fund will do worse than the market on a risk-adjusted basis||Consider using index mutual funds or exchange-traded funds (ETFs) that attempt to match the performance of their given market sector. Be happy with what the markets give you and enjoy the lower costs.|