If confronted with a market correction or bear market, take time to review your portfolio. Are all your investments in stocks? Have you invested in only a few high-flying stocks?
Remember, all investments involve risk. As a long-term investor, you can afford to ignore short-term price changes. But you can also make the long journey a little more enjoyable by taking a few steps to help protect your portfolio from a drop in stock prices. Here’s a short list of some risks you face as a holder of stocks, and some ideas about how to reduce the chances that your portfolio suffers a big loss.
1. Market Risk – is common to all investments. If stock prices fall by 10%, market risk says your stocks are likely to drop in price as well. You can help manage market risk to stocks by allocating part of your portfolio to other assets, such as bonds or and Treasury bills. When stock prices decline, it’s possible that a rise in non-stock investment may help cushion the fall.
2. Under diversification – if you only own a couple of stocks, your portfolio is extremely vulnerable if one suffers a big decline. Also, it’s important that each stock in your portfolio be in a different industry group. Owning eight computer-related stocks will do you little good if the prospects dim for the computer industry.
3. Volatility – this is less of a concern for the long-term investor. Someone who is investing for retirement in 30 years should not be too concerned if the investment bounces around from one day to the next. What is important is that the investment has the potential to perform up to expectations in the long term. You can help manage volatility risk by investing the money you may need in the next five years in a more conservative investment. You can be more aggressive with the money you earmarked for use in 15 to 20 years, if that would be suitable for you.
Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, a registered investment advisor.