When it comes to financial planning, we believe that protection and preservation of wealth are of the utmost importance. However, different phases in the saving and investing process, as well as highly volatile market conditions, call for different ways and means of managing market risk. There are times when you may want to adjust your strategy and take steps to reduce your risk exposure in your portfolio.

Here are three important financial phases that you will want to keep in mind when saving or investing for your future retirement:

1. The Accumulation Phase

This is the period in your life where you are actively saving to meet a major life goal, generally retirement. Other goals may include buying a second home, investing more in your business, or even paying for your child’s college tuition. This is one of the main areas where financial advisors usually focus their attention when working with clients.

2. The Preservation Phase

This phase involves preparing for the transition from accumulation to distribution. Naturally, since invested funds will be needed sooner rather than later at this juncture, preservation will be paramount. This generally involves reducing the amount of risk exposure in your investments. Many traditional financial advisors may recommend rebalancing your portfolio during this time period.

3. The Distribution Phase

This is the period when your investments should have the least exposure to risk as you will be relying on them to fund your goals. Of course, outpacing inflation and seeing some moderate returns are ideal, but for the most part, risk should be kept to a minimum depending on your situation. This phase is sometimes neglected in the standard financial planning process, which may include rebalancing your portfolio from time to time, but may not always address issues such as sequence of returns risk, which can severely deplete your retirement savings if you are drawing from them during a down market. (This is where working with a holistically-minded financial professional can help.)

When to Consider Reducing Risk

The closer you get to your retirement years, the more important it is to preserve the wealth you have accumulated through risk reduction strategies. The logic is relatively simple: the shorter your timeline to meet your goal, the less risk you can take that equity markets will fall and severely deplete the value of your portfolio. As you move through the three phases above, you and your advisor can begin the process of building a more conservative allocation.

Another instance where you and your advisor may take steps to reduce your portfolio risk is in extended periods of market volatility. The longer the volatility lasts, the more aggressive adjustments you may choose to make with your investments. Of course, depending on which phase you are in, you may not want to pull out of the market completely, but simply to re-align your portfolio’s risk level with your own personal timeline and tolerance.

4 Ways to Reduce Risk In Your Retirement Portfolio

While no single approach will work for every investor, here are a few popular approaches to reducing risk:

1. Re-Balance in a Timely Manner: Over time in thriving markets, it is not unusual for stock allocations to grow a little too high. When a market correction hits, though, a portfolio over-weighted in equities can suffer a severe blow.  This allocation leaves investors incredibly vulnerable when they might not be able to handle it. Re-balancing keeps the scales balanced in a way that limits your exposure to risk.
2. Diversify into Bonds or More Conservative Choices: On a scale of relative risk, bonds, annuities, or cash value life insurance can be a safer choice than equities. Of course, they generally do not offer the same high returns, but when preservation is a priority (for example, during the Preservation or Distribution Phases), safeguarding wealth trumps risk-dependent returns.  
3. Keep Liquidity High: Should the markets significantly drop or temporarily close down, keeping liquidity higher than usual can act as a safety net for emergencies. Transferring money to savings, money market funds, or high cash value life insurance can help to preserve liquidity and maintain access to your money while reducing risk.
4. Choose High-Quality Stocks: Savvy market investors may choose to invest in higher-quality companies that show less debt and superior cash flows. In volatile times, the strong and stable businesses are generally the ones that can best withstand market setbacks and bounce back more quickly. 

Next Steps

Many savvy investors are taking steps now in these volatile times to rebalance their portfolios. Depending on the complexity of your assets, this could take some time and calculation to get right so we encourage you to act right away.

While no one is sure how long a bear market will last, it is always best to prepare for the unexpected. Your financial health and and future retirement may depend on it.

Are you unsure whether your retirement portfolio is positioned to handle more volatility and uncertainty? We're here to help! Simply schedule a call or send us an email and we will be happy to take a look at your current allocation and timeline and help you develop a holistic plan to meet your specific needs and goals.

Disclosure:

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.

This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific situation with a qualified tax professional.