7 Ways To Balance Risk in Your Retirement Portfolio

retirement plan portfolio on top of vintage stock certificates.
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When it comes to retirement, risk can be a scary prospect. But it mustn’t be avoided, no matter the urge; risk is, after all, a reality. 

“There are any number of risks involved [in retirement], including higher than expected inflation — as we are currently experiencing — not earning what you expect on your investments, losing a job unexpectedly, becoming ill and incurring higher healthcare costs, needing to help family members, etc.,” said Drew Parker, creator of The Complete Retirement Planner. “Everyone’s situation is unique, but it is crucial to anticipate where your greatest potential risks lie and then understand how to balance those risks with possible actions that will help to positively impact the outcome.”

It is crucial to plan for risk when building out your retirement portfolio. This is a strategic process that requires a bit of investing prowess. You needn’t be an expert, but some research can go a long way.

Let’s explore seven ways to balance risk in your retirement portfolio, according to finance experts.   

Determine Your Risk Tolerance

Everyone has a different appetite for risk; furthermore, your appetite is often defined by where you are in your life and how close you are to retirement. If you’re 22, you should be more open to risk than if you’re 60, by which time you should be deeply risk averse because you’re running out of time to gamble. 

Are You Retirement Ready?

“Before you start investing, understand your risk tolerance,” said Ryan Zacharczyk, CFP, president and founder of Zynergy Retirement Planning. “This will help you determine your portfolio’s appropriate mix of stocks, bonds and other investments.”

To help assess your risk tolerance, you can use an online questionnaire or calculator, which will ask you questions about your financial situation and investment preferences.  

“The results can help you identify an appropriate asset allocation that balances risk and return based on your personal circumstances,” Zacharczyk said. “It’s important to remember that risk tolerance can change over time, so it’s important to reassess your tolerance periodically.”

Diversify Your Portfolio 

Diversifying your portfolio can help mitigate risk by allocating your investments across different areas. It’s the equivalent to not putting all your eggs in one basket. 

“Make sure your money is invested in several key investment assets,” said Alvin Carlos, CFA, CFP, financial planner and managing partner at District Capital Management. “That includes U.S. large company stocks, U.S. small and mid-sized company stocks, international stocks and U.S. bonds. The first three — stock funds — are very volatile but have a high growth potential. U.S. bonds are more stable, give dividends, but will have minimal growth. The stocks and bond mix will depend on how much risk you are willing to take.”

Invest in High-Quality Bonds

Carlos mentioned bonds, but this is an important point to highlight as not all bonds are created equal. 

“High-quality bonds, such as government or investment-grade corporate bonds, are generally considered less risky than lower-quality or high-yield bonds,” Zacharczyk said.

Are You Retirement Ready?

Choose Low-Cost Funds (You Can Google Them)  

How to choose a fund? This requires a bit of work, but nothing that good old Google can’t help you handle. 

“Google each fund, and find the ‘expense ratio,'” Carlos said. “This is the fee you pay for investing in that fund. The higher the fee, the more money it will take away from you. Here’s a simple technique to find low-fee funds: Look for the word ‘index.’ Index funds have lower fees. Studies show that over 90% of lower-fee funds outperform higher-fee funds over 10 years.”

Avoid Buying Individual Stocks 

Some advisors may dish out different advice, but Carlos cautions: Stay away from individual stocks when balancing risk in your retirement portfolio. 

“It’s really tempting to find that next Amazon or Facebook stock that will make you an instant millionaire, [but] this is a distraction,” Carlos said. “Focus on choosing diversified low-cost funds. They own companies that make money, which will in turn make you money over the long haul.”

Routinely Check for Rebalancing 

To manage risk, it’s critical to routinely check your portfolio for rebalancing needs. 

“Typically this involves the selling of assets that are overweight in your portfolio and reinvesting the proceeds into assets that have fallen,” said James Marquez, a wealth advisor at Capstone Financial Advisors. “This will ensure that you are not drifting too far from your targeted asset allocation and are systematically ‘selling high’ and ‘buying low.'”

Are You Retirement Ready?

If you don’t routinely rebalance your portfolio, you’re setting yourself up for a risky scenario. 

“Investors who do not routinely rebalance their portfolios are at risk of having their investments skew more aggressively since stocks tend to generate higher returns over longer periods of time relative to bonds,” Marquez said. “This can potentially be problematic if there is a severe decline in equity markets and you were planning to use your stock portfolio to fund your living expenses.”

Consult With a Financial Advisor 

Retirement is a serious thing and millions of Americans go in underprepared. Online research is fine, but really the best thing you can do is meet with a financial advisor or retirement planner to assess your needs and balance your risk.

“Financial advisors can help construct a retirement portfolio tailored to your needs and risk tolerance,” Zacharczyk said. “Also, they can provide guidance on rebalancing and other investment strategies.”

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