Investment Risk Management

Most investment advisers suggest overly risky portfolios for young people, while at the same time recommending portfolios that do not to take enough risk for people in retirement. What we try to achieve is a balance between reward and risk. Sure younger investors should take more risk than retired investors, but in both cases it is also important to consider balancing your risk. The typical middle of the road investment portfolio consists of 60% Stocks and 40% Bonds. When looking at it from the perspective of how the risk is distributed in your portfolio, you actually have 90% invested in Stocks and 10% invested in bonds. Even worse, the typical portfolio has over half of its risk from investing in Large Cap Stocks. Clearly there must be a better way.

60/40 Porfolio Asset Allocaton 60/40 Portfolio Risk Allocation

Insightful Asset Allocation

A better approach to asset allocation and portfolio diversification is to create a more diversified portfolio that has less exposure to equities than most people have. Our target, or as we like to call it, Insightful Asset Allocation, has far more asset classes than provided by target date funds, or the typical investment adviser. Most people would be better off with a portfolio built the opposite way, with 60% Bonds and 40% Stocks. That in itself would improve the risk characteristics of your portfolio. Even better would be to take that “Swing” 20% and put it in hedged equities and commodity futures. In addition, the bond portion of your portfolio should be more diversified than what it is today. At the very least, you would do better in the long run with a portfolio that is only getting 60% of its risk from Stocks, and getting the rest from Bonds and other asset classes.

 

Insightful Portfolio Asset Allocation Insightful Portfolio Risk Allocation

Conservative Asset Allocation

If you are getting close to retirement age, or you just have a very low tolerance for risk with your investments, your portfolio should reduce your exposure to equities to only about 25%. Even with this reduced allocation to equities, stocks will still make up the majority of risk in your investment portfolio. Our Conservative Asset Allocation is about has about as balanced of a risk profile as is practical, unless of course you look at our Retirement Asset Allocation.

 

Conservative Portfolio Asset Allocation Conservative Portfolio Risk Allocation

Aggressive Asset Allocation

On the other hand, if you are young, have more than 25 years until retiring, or we are in an excellent economic environment, you can bump up your stock exposure to the 50% level of our Aggressive Asset Allocation, even if this will leave you with 75% of your portfolio risk from equities. Otherwise, we would suggest that you stick with the more moderate targets of our Insightful Asset Allocation.

 

Aggressive Portfolio Asset Allocation Agressive Portfolio Risk Allocation

Retirement Asset Allocation

You do not want to throw all of your investments in cash when your retire, but then again you do not want to invest it all in the stock market. Our recommendation for retirement is to always have a couple of years available as cash, say about 10 %, and about 20% in the stock market. Retirement is not the time to throw away the concept of having a risk balanced portfolio. In fact, this is even more important during retirement.

Retirement Asset Allocation Retirement Risk Allocation

401k Asset Allocation

Investing in your company’s 401k plan is one of the best things you can do to get yourself ready for retirement. There are several benefits to taking action on this, the first of which is saving money on a tax deferred basis for your retirement. Second, if your company matches some or all of your contributions, you have immediately earned 100% on your matched investments in your 401k plan.

Since most 401k plans allow you to set aside a certain percentage of your paycheck every month to contribute to your 401k plan, you are Dollar Cost Averaging your investments. The result is that more shares of each mutual fund are purchased when prices are relatively low and less are purchased when prices are relatively high. While you are not likely to have all of our favorite mutual funds in your 401k plan, consider using one of our model asset allocations to put together your own diversified portfolio with the funds you have available.

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