The four basic approaches to portfolio risk management are:
- Avoid the market risk of a certain investment or asset class altogether by not allocating capital to it and accepting the potential opportunity cost of not doing if that investment or asset class does well in the future.
- Transfer the market risk in some fashion through various available insurance products where an insurance company will accept some or all of certain identified market risks for some kind of explicit fee, inherent cost or reduced return to you in exchange.
- Manage the market risk through some kind of actively managed investment strategy designed to be either reactive or proactive with changes to the portfolio during times of economic stress or market downturns with the goal of preserving capital and minimizing losses.
- Accept the market risk believing in the long run the investment will perform well and be worth the risks taken. Even within this approach it is prudent and common to still attempt a degree of overall risk management through diversification so not to have all the proverbial eggs in one basket.
Ultimately, portfolio risk management is a very personalized facts and circumstances matter that should be discussed in depth with your investment advisor, so the ultimate portfolio construction is aligned for your personal appetite for volatility and tolerance for potential losses while in pursuit of your overall portfolio goals and objectives.
Jeff Acheson CPWA®, CFP®, CPFA™, AIF®, CEPA® draws upon his extensive experience, credentialed expertise and expansive relationships to provide perspective on a myriad of topics that impact the pursuit of financial independence.