Write Me a Prescription, Doc
Sometimes clients like to joke around when they call and recently, in the midst of a particularly choppy market session, a client called and said, “My portfolio might be coming down with a little something. Write me a prescription, Doc.”
Kind of like weight loss, there is no magic pill for completely avoiding risk when it comes to money (even stuffing money in the mattress has the risk of opportunity cost). While there are investors who want to take on even more risk when markets decline hoping to catch gains on the rebound, for those who are more risk averse, there are a few techniques a financial advisor might help with (remember, there are no guarantees to completely avoiding risk):
- “Don’t put all your eggs in one basket”. This saying holds true in risk mitigation approaches, as diversifying assets so that an investor is not heavily concentrated in one position may help to reduce exposure to potential loss.
- Principal-protected investments. There are investment products which may have downside protection features to help protect principal. Please note that upside potential may be tempered.
- Option strategies. Financial advisors might utilize option strategies to help limit risk exposure. These strategies might be employed when a client holds a concentrated position, such as in the case of holding stock from a company where they worked and earned a lot of this stock over the years in their workplace retirement plan and does not want to sell it due to an emotional attachment to the position.
- It is important to consider how the price movement of investments within a portfolio affect one another. Allocating assets to have low or no correlation with one another may help to lessen overall portfolio risk in periods of decline. How well do your assets get along with one another?
- Dividend payments. It may still be possible to make money on a stock even if the price has declined. Stocks that pay high dividends may limit the amount of money eroded from your portfolio during a period of market downturn.
- Stop loss order. A stop loss order is one that is entered to trigger a sale in a security should it fall to a particular price in order to limit the amount of loss. A stop order does not protect gains or “lock in a price”. This type of order simply triggers a market order when the price of the stock hits a trigger point.
If you have an appreciated asset whereby taking the gain through a sale has brought with it a potential tax burden, considering the potential for pairing it with a sale in a losing position to help lessen that tax hit might be a helpful approach (Seek advice from a qualified tax professional).
Consider your own feelings toward risk, as opportunity or enemy or a combination of the two. Talk to your financial advisor about your overall financial health. Just like being completely honest with your medical doctor, being completely honest with your financial advisor can help them to “prescribe” the approach to risk within your portfolio that might be right for you.
Not sure what approach to take? Ask! It’s what we are here for. I am always pleased to provide priority appointments, including by phone.
Please note the following disclosures:
There is not guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Asset allocation does not ensure a profit or protect against a loss.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
I am pleased to assist you, your family members, friends, and colleagues and offer a complimentary first consultation.
The opinions expressed are those of the author. Seek professional advice before taking any action in regard to your finances.
Todd A. Slingerland, CFP®
6 Tower Place Albany, NY 12203 (518) 867-4000 x105 firstname.lastname@example.org