Building a more balanced portfolio
Market theories have long told us that investors must take on more risk to achieve a potentially higher return. Taking more risk is often the preferred strategy for accumulation-focused investors with a longer time horizon before they start retirement. The longer time horizon helps them to better absorb and rebuild from periodic losses due to market downturns.
The risk/return decision becomes more difficult the closer the investor is to retirement. Any losses could more negatively affect their retirement portfolio because they have less time to rebuild their investment portfolio from market losses. These investors face a key challenge – how to balance riskier equity investments designed to accumulate enough assets for retirement with the need to protect their portfolios against catastrophic losses.
In weighing this balance, each investor must consider risk and protection on a scale. On the risk side sit equity investments with unlimited upside potential and no protection against loss. On the protection side sit fixed income investments such as high-quality, shorter-term bonds, bond mutual funds, CDs, fixed annuities, or even the cash-under-the-mattress strategy. These options provide a greater level of certainty, but at the cost of lower upside potential, the risk of not keeping up with inflation, and such factors as fees and charges for guarantees.