4 ways you can protect your wealth from down markets

4 min read
May 6, 2020

We hope that you are reading this blog from the comfort of your home, in good health, and with consistent income. Right now, those things aren’t something to be taken for granted. There is a lot of uncertainty in the air, and markets respond to that uncertainty with higher volatility - bigger swings up and down. Or, to put it another way, investing carries more risk now.

This post will address some strategies to reduce the overall risk in your portfolio. For some of you, we can understand portfolio risk management is pretty low on the to-do list right now. But bear with us. These strategies can help out in good times and bad. 

One more thing before we get going. If you're in need of more immediate guidance on how to generate short-term emergency cash, take a look at our previous blog here for some ideas. OK, with that said, let’s take a look at some ways you can mitigate volatility and protect your wealth.

Diversify to protect your assets

This is, in your humble writer’s experience (and in others!), the number one thing individual investors get wrong. And it’s a shame, because it’s the most important thing to get right. Proper diversification comes from owning a mix of different asset classes properly allocated to the time horizon and risk tolerance of your unique goals. That is, how far out your goal is and how willing you are to stomach the ups and downs of the market to achieve a higher expected return.

Investors get this wrong all the time because they chase stocks or because they simply don’t take the time to rebalance. The fact is that diversified portfolios fare better in times of market volatility. No one can control the market, but you can control your allocation. That doesn’t just mean picking a handful of stocks either. You want to diversify across asset classes (stocks, bonds, real estate, etc.) as well as across the underlying investments in each. Quite simply, a properly diversified portfolio is the best form of protection your wealth can have. 

Build and maintain an emergency fund

Cash is boring and savings accounts don’t earn much interest in today’s marketplace. However, having money you can count on set aside in an account that you don’t touch is an important part of any good financial plan. Put simply, an emergency fund is your buffer for the unexpected. It’s self-insurance for the downs in life.

By keeping funds set aside in an account that safely generates return but is also there should you need it quickly, you also reduce the risk you’ll need to withdraw from your other funds in down markets. That could mean the difference of bearing the full brunt of a market downturn by withdrawing at the nadir and riding the wave of positive returns back to the market’s previous peak. 

Protect your assets with appropriate insurance coverage

Insurance is a broad topic that would require its own separate coverage. We’ll simply report that insurance can have its place in protecting your physical assets (homeowner’s, personal property), your income streams (disability, life), and your financial assets (annuities, derivatives). Each type of insurance has a cost associated with it, but if minimizing the risk you’re willing to bear is important to you, we’d be remiss if we didn’t bring it up. 

Talk to an advisor and don’t sell

Investing for the long haul is an effective way to protect your wealth in times of market volatility. We humans have a penchant to let our animal spirits get the best of us at times. We get scared when things are unknown. This is normal. But when it affects your portfolio, it can be devastating. 

That’s where an advisor comes in. Having someone that you can talk to and who can provide some perspective is an incredible advantage when it comes to protecting your wealth.

A big mistake we see is selling at the bottom of a market. It can be scary to hold onto your investments as you see the daily parade of stock prices in a down market. Just remember, your investments represent ownership of real businesses. That ownership doesn’t change with daily ups and downs. Holding on for the long run is how you’ll generate real wealth. Your advisor is there to help you find the strength to do so.

To sum up, you don’t have to go it alone. You can go farther with a little help in tough times.

Ryan Koenig

Principal Advisor @ Farther

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