Once you have spent time and money building up your personal portfolio of securities and assets, you will want to start thinking about how to minimize your portfolio risk. The one piece of advice that you will hear overall is that it is important to diversify your portfolio as much as possible. That way, if any individual securities fall through, you will hopefully still have money tied up in other areas, and avoid losing everything. This can help you weather the ups and downs of the economy. In addition to this type of risk, however, there are other risks that can relate to market changes, your life span, and other factors. These are worth examining as well.
There is a risk that you will outlive your money, known as longevity risk, for example. To avoid this type of portfolio risk, you will need to have a withdrawal rate that is in line with your budgetary needs. A low-cost annuity can help you keep a lifetime stream of income, along with Social Security payments. Another type of risk that you may come across is liquidity risk, or the risk that you won’t have cash that you need when you need it, forcing you to sell your assets for less money than they are worth. To avoid this, experts recommend that you set aside a percentage of your cash for each major goal in life, and have accessible liquid assets, such as short-term bonds, in those accounts.
Market risk is the type of portfolio risk that many investors think of when they are looking at the various ups and downs of the economy. This is the risk that stock and bond markets will fall, devaluing your assets. By diversifying your portfolio with stocks, bonds, and cash, you should be able to wait out any bear markets. Be sure to look over your portfolio from time to time with a financial advisor to see if there are new areas you can invest in.
Finally, there is a certain risk involved in working with financial professionals. Manager risk is the term that is assigned to the idea that there is a risk that you will pick the wrong person or institution to manage your money. By using mutual funds and researching your professional money manager, you can avoid this risk and be sure to keep some sort of profit rolling throughout your lifetime, with minimal loss.