Are you concerned with how investment losses may impact your retirement savings? It’s a valid concern, as substantial losses could limit your ability to generate income and enjoy retirement. You can’t predict what’s going to happen in the market, but there are steps you can take to manage volatility and protect yourself from serious losses. Below are three actions you can take to protect your investment portfolio. Consider implementing these steps in your investment plan:
Diversify. One of the best ways to protect your portfolio is to keep it diversified. A diversified allocation is one in which your money is spread across many different asset classes. For instance, you may have money in domestic large cap stocks, foreign stocks, small-cap stocks, cash, and a wide range of different types of bonds. The benefit of diversification is that you don’t have all your eggs in one basket.
Rarely do all asset classes perform exactly the same way. If you have one asset class that is down dramatically, it is likely that you will have other asset classes that are performing well. That should add balance to your portfolio and prevent poorly performing asset classes from dragging down all of your investments.
Match your allocation to your risk tolerance. There’s no correct allocation that is right for everyone. Rather, your allocation should be in alignment with your unique goals, needs, and your risk tolerance. Your risk tolerance is the amount of volatility and downward movement you can tolerate in your portfolio before you decide to sell. If you have a low tolerance for losses, then you should gear your allocation toward low-volatility investments. If you have a high tolerance for risk, you may want investments that have greater volatility and more potential for return.
Again, that doesn’t mean you should put all your investments in one asset class. You still want to maintain a diversified portfolio. However, the way you spread your assets among those investments should be based on your own tolerance for risk.
Don’t panic. When the market is on the decline, it may be tempting to sell all of your investments. Many investors believe that if they sell they will avoid further losses. However, the problem with this strategy is that you can’t predict what your investments will do in the future. You may avoid future losses by selling, but you also may miss an upturn in the market, losing out on your chance to recoup losses.
Instead, take a long-term approach. Understand that the market moves in cycles, and what is happening today isn’t likely to be permanent. Although losses may be tough to withstand, by getting out of the market you forego any opportunity to participate in the recovery.
For more information, talk to a financial planner who has experience with portfolio management. They can help you implement strategies to limit your investment losses. Visit a site like http://globalwealthconsultants.com to find a financial planner.