It’s important to keep a cool head in volatile times. Here are four strategies for reducing risk in your investment portfolio.
A new year brings with it new conditions and 2019 has already doled out its share of volatility.But it’s not all doom and gloom. There are ways to de-risk a portfolio and insulate it from economic potholes. Here’s how the experts suggest setting up safeguards.
Don’t waste time
Time is an investor’s best friend. So if you’re thinking about boosting your portfolio, it’s better to invest as early as you can, says Jason Featherby, director of Knight Financial Advisors.
‘The more time you have behind your investment, the more time you’ll be able to ride out any fluctuations and also compound your interest,’ he says. ‘Regardless of whether you’re buying a property or share portfolio, the longer you have, the better your returns will be and the lower the risk you’ll take.’
But don’t rush. Do your research and find good professional help to make the best decisions about where to direct your investments.
Build realistic expectations
Recent market peaks are behind us, so now is the time to adjust your expectations. House prices have risen sharply in the past decade and the market has since levelled out, says Featherby.
‘With interest rates and inflation really low, double-digit returns are difficult to get,’ he explains. ‘So if we expect less and we’re more realistic about our returns, we’re more likely to keep calm when the returns aren’t in double digits.
‘The greatest risk to any portfolio is ourselves because we tend to overreact and not act rationally when things aren’t going so well.’
Don’t make the mistake of putting all your eggs in one basket. Diversification is vital. Consider your risk profile along with your financial goals before selecting your allocations. Assets such as property or shares are more high-growth oriented, while cash, term deposits and bonds are more conservative choices.
Banking shares are likely to recover in 2019, while the aged-care sector is likely to be impacted by this year’s Royal Commission into Aged Care, says financial planner Scott Haywood.
‘I think we need to be prepared for some real war stories and aged-care stocks have already dropped 40 per cent since the royal commission was announced, so that sector will come under more pressure,’ he says.
Other investment alternatives include gold, cryptocurrencies, art, wine and collectables. But be aware that all of these investments have their pros and cons, so it’s best to do your research and seek professional advice.
In investment, it’s critical never to take your eye off the ball. Monitor your portfolio’s performance, benchmark it against averages and be prepared to make changes if your assets aren’t performing well.
The necessary task of rebalancing, where some assets are sold and new ones bought, always helps bring a wayward portfolio into alignment with a target asset allocation, says Featherby.
‘Make sure you’ve got the discipline to rebalance – it takes no special skill or know-how and is a really essential tool in de-risking a portfolio,’ he says.
Attention: Investment is subject to DHA’s lease terms and conditions of sale. Investors retain some responsibilities and risks, i.e. rent, restoration and market fluctuations. Prospective investors should seek independent advice. See dha.gov.au/lookforward for relevant information.