How to Reduce Financial Risk

When it comes to investing your hard-earned money, there are times when you will want to reduce your financial risk. Sometimes, the investments you already have will become more risky. Other times, you may just change your goals and strategies about how risky you want your investments to be. Either way, to reduce your financial risk without harming your overall portfolio, you need to make savvy moves.

Difficulty: Moderate

Instructions

1. Determine the level of risk you want to have in your portfolio. Risk can be defined in many ways. The most useful for most investors is as a ratio of conservative (less risky) investments to aggressive (more risky) investments. Conservative investments will be less volatile than aggressive investments, so the more of them in your portfolio, the less risk overall.

2. Assess how risky each element of your overall portfolio is. Before you can reduce financial risk in your investments, you need to know how much risk you currently have. Be sure to include all accounts in your assessment.

3. To reduce financial risk quickly, replace one of your most aggressive investments with a very conservative one. Selling an aggressive investment and leaving the proceeds as cash in a money market account can create the biggest single change in financial risk.

4. Alternatively, you can add a safer investment to your portfolio. The advantage to this method is that you do not have to sell any of your investments. Treasury bills are the safest investment according to most systems. Purchasing T-Bills will make your portfolio less risky overall. Other good options include high-rated general fund muni bonds. These bonds are municipal bonds that are backed by the entire taxing and spending power of the municipality.

5. Re-evaluate your portfolio to determine how much risk there is now. If your portfolio is still too risky, continue replacing investments or adding conservative ones until you are happy with the level of risk.

Tips & Warnings

• A general rule of thumb for retirement investing is to subtract your age from 100. The resulting number is the percentage of your portfolio that should be invested in more volatile investments such as stocks, while the remainder is invested in less volatile investments such as bonds.
• Always consider the fees, expenses and tax consequences of any decision to buy or sell securities. Consult with a tax professional. This is not an offer to buy or sell securities. This is not a recommendation to buy or sell any securities.

References

• FINRA - Risk Tolerance Understanding
• FINRA - Managing Investment Risk