How To Manage Risk in Volatile Markets

Growing your money to secure your retirement is something that everyone should do as part of their retirement planning. Active management, which is what we do, is something that clients come to us for because they want us to manage their portfolios.

If you wanted a very low-risk investment you could keep your money in treasury bonds, CDs, or a savings account. However, growth opportunities with these types of investments are very limited. You might put some of your money in these accounts, but not 100%, because the potential to grow your money falls too much with a conservative investment portfolio.

Managing risks, especially in a volatile market, is more difficult for many investors because if you put all your money into an S&P 500 index, you take on all the associated risks in the process.

In the years 2000–2002, the S&P 500 was down 50%, meaning many retirees had their portfolios cut in half. Imagine if you’re withdrawing money from this portfolio at the time of a major decline, causing a compounded problem in the process.

Now, you could take 60% of your money and put it in the market and the other 40% into bonds. Come 2021 and 2022, and the bond market goes into a crisis, causing a lot of people to lose the money that they thought was very low risk.

Active Management to Lower Portfolio Risks

Managing your account actively helps negate these risks because we move within the market and take a very hands-on approach to growing your money.

Metrics and data points are used to help a person maximize their money within their own risk threshold. For example, hedge fund managers often try and make their clients the most money possible. The issue is that big returns also come with larger risks.

In an active management strategy like ours, our clients want safety and security and aren’t chasing the homerun gains that some of the other managers strive for with their clients. Instead, our active management approach maximizes returns while keeping risk at a minimum.

Many people are 10 years from retirement and have been through 2008 and 2020-2021, when the markets took a nosedive, and they don’t want to shoulder large risks any longer. As you get closer to retirement, earning and income potential begins to fall. At this point, you need to mitigate risks as well as you can.

When you have an active management strategy, the goal is to put your money into the best investment vehicles at the time.

Data allows an active management strategy to take place because we focus more about what the data is telling us and less about specific news on inflation and the debt ceiling.

Investing comes with pros and cons, but if you pick an investment strategy that works well for you, it can also help you secure your retirement.

Example from an Industry Podcast

Recently, on an industry podcast, they had a few financial advisors as guests to speak about how they manage their clients’ money. There was one response that stood out the most. This individual used to take part of the clients’ money and invest it actively, as we discussed above, and mentioned that the logistics of the approach were too complex and resource-intensive. Ultimately, they transitioned into a buy-and-hold strategy for their clients. The manager wasn’t set up for the trading involved in an active management environment, and a buy-and-hold strategy is easier to manage. 

With a buy-and-hold strategy, the most that needs to be done is balancing the portfolio on a monthly or quarterly basis. Technology makes this a touch-of-a-button scenario. Simply put in the wanted parameters, tap a few buttons, and rebalance a portfolio.

Instead, when we actively manage a portfolio, we check risk daily and will readjust a portfolio regularly. It’s unlikely that we need to perform a readjustment every day, but we’re ready to when it’s necessary.

At Peace of Mind Wealth Management, we like to manage our clients’ money in the same way that we invest our money: actively.

We find that an actively managed portfolio reduces risk greatly, which in turn reduces immense emotional tolls from portfolio losses.

Imagine losing 10% of your portfolio, realizing you lost $100,000 or $200,000. It doesn’t feel good. You can have a portion of your retirement savings in the market and another portion in safer investments that still offer plenty of opportunities.

This is why active management in a portfolio can be a powerful tool in retirement planning.

Asset Classes in a Portfolio

During any given year, some asset classes in a portfolio may be working and others are not. Asset classes can be a lot of things, such as:

  • Large-cap stocks
  • Mid-cap stocks
  • Small cap stocks
  • International markets
  • Emerging market investments
  • REITs
  • Investment bonds
  • Treasuries
  • Cash

Year-over-year asset classes move around, just like we saw in 2022 when the S&P 500 was down nearly 20%. Cash and treasuries were the leaders of asset classes in 2022 because they provided some level of return.

In 2021-2022, the 60/40 flaws started to show because a lot of the investment bond yields were down 11% – 13%. Bonds, for some people, were down as much as their market investments. At the time, many people thought it wasn’t possible to lose money in bonds.

Monitoring asset class movements and structuring a portfolio is how we like to invest our clients’ money. Monthly and quarterly data analysis and restructuring of asset allocation empower us to put investments in what’s performing well right now.

If the upswing and downswing of the market don’t bother you, then a buy-and-hold investment strategy may be better for you.

However, a lot of clients of ours love making a good return with minimal risk. Clients may sleep better at night and have peace of mind that they won’t wake up with a portfolio loss of 20%. This is what an actively managed portfolio provides.

Click here to schedule a 15-minute complimentary call with us to learn how your investment portfolio can be actively managed.