Are you an investor or retiree looking to preserve your wealth while still reaping the benefits of the market? You’re in the right place. Navigating the world of investments can be frustrating, and perhaps all of the market volatility involved is keeping you up at night. The truth is that some level of risk is guaranteed, no matter what the investment is — and yet we have good news…
There are a few key courses of action designed to help you manage risk while offering respectable returns. This blog post will guide you through the essentials of risk managed investments and introduce you to three powerful strategies — strategies that can help you sleep better knowing your money is working for you, not the other way around.
Understanding Risk Managed Investments
What is Risk Management?
Risk management in the investment world refers to the process of identifying, analyzing, and mitigating the risks associated with any investment portfolio. These risks can range from market fluctuations to economic downturns and even geopolitical events. The aim is to protect your capital and ensure long-term financial security by balancing risk and reward.
The Significance of Risk Management
Why is risk management crucial? The theory behind it is simple: it allows you to safeguard your investments against unforeseen events that could erode your capital. For retirees, this means having a steady income stream without the fear of losing your nest egg entirely. For investors, it translates to strategies designed to elicit respectable, sustained growth while minimizing potential losses.
Common Investment Risks and Mitigation
Several common risks can affect your investments:
- Market risk involves the ever-present potential for losses due to market fluctuations.
- Credit risk is the possibility that a bond issuer will default on payments.
- Lastly, interest rate risk describes the impact of changing interest rates on your investments.
Mitigating these risks often requires savvy investors to employ tactics including diversification, proper asset allocation, and the use of hedging techniques.
Types of Risk Managed Investments
Diversified Portfolios
Diversification is the practice of spreading your investments across various asset classes, such as stocks, bonds, and real estate, to minimize market risk. The main benefit of diversification is that it reduces the impact of poor performance from any one investment class.
Imagine that you own a mix of tech stocks, municipal bonds, and commercial real estate: if one sector underperforms, the others can help cushion the blow, leading to a more stable portfolio in the long-run.
Bond Laddering
Bond laddering involves purchasing bonds with varying maturity dates, thereby reducing interest rate risk. For instance, you might buy a selection of bonds that mature in one year, five years, and ten years respectively.
This strategy ensures that you always have bonds maturing, which then allows you to reinvest at current interest rates. This could be a great way for you to maintain a steady income stream while minimizing the risk of interest rate fluctuations.
Managed Funds
Managed funds offer professional management also aimed at reducing market risk. These funds pool money from multiple investors to invest in a diversified portfolio. The fund managers who look after these use their expertise to make informed investment decisions, balancing risk and reward.
Examples include mutual funds and exchange-traded funds (ETFs). Managed funds like these could be ideal for those who prefer a hands-off approach but still want to benefit from a well-diversified portfolio (as you are essentially employing someone to do the dual jobs of investment and risk management for you).
Benefits of Risk Managed Investments
Long-term Growth with Lower Volatility
Risk-managed investments aim for steady, long-term growth with less overall volatility. A diversified portfolio, for example, balances high-risk and low-risk assets, smoothing out returns over time.
Capital Protection
One of the main advantages is the protection of your capital against market downturns. By spreading investments across various assets and using hedging techniques, you could reduce the likelihood of significant losses.
Financial Confidence
Knowing that your investments are managed in a way that prioritizes risk reduction could bring you financial confidence. This is particularly important for retirees who rely on their investments for income and cannot afford regular, significant losses.
The Dangers of an Overly Cautious Approach
After working in the industry for over 16 years, our president, Greg Liszka, understands why some clients might want to take the most cautious approach possible, but he also knows that there are connected pitftalls to extremely conservative investments:
“There are ways to put ‘guarantees’ in the portfolio: the annuity world, which is the only place where you can offer guarantees, because those are contractual guarantees (for some annuities, anyway — there are a lot of bad annuities).
Even so, compliance would never let us put all of our client’s money into an annuity. There are laws against that. The SEC has come out with a 50% cap. Why? Well, you would never want to lock somebody’s money up in something that doesn’t have the liquidity features you need…
What if you need a new roof, and you just have to grab $20,000? If everything is structured in an income stream without the liquidity to access it — as you would have with an annuity — then you would be in trouble. It would be very difficult to get your way out of that.
The reality of life is such that you can never fully protect against its many surprises. That’s why it’s important to retain a degree of flexibility in your investment practice — and that’s also why it’s important to seek wise counsel when deciding how to structure your portfolio; others with more experience and understanding of the regulatory environment than you can add immense value…
Unlocking the Creative Potential of Risk Managed Investments
The truth about risk managed investments is that they often require greater creativity than conventional wisdom accounts for. In general, if you invest long-term in the stock market, you are likely to see significant growth over time. But on the flip-side, it’s much harder to find real value for conservative investments (ones that don’t involve stocks).
As Greg Liszka, our president, puts it:
“More often, the uniqueness comes in the desire for safety rather than the desire for growth. The growth story is, frankly, easier. It can look like a lot of different things but, a lot of times, it looks similar. But when people have a desire for income or safety, that goes way beyond saying, “We just need to give you more bonds.” Instead, employing different options and strategies — like structured notes or CDs — can help us to achieve your desired outcome.”
In other words, when it comes to risk managed investments, you are probably going to need to enlist the help of a professional. The kinds of investments we’re talking about here go beyond what most DIY investment apps can provide.
Dual-Direction Structured Notes
Perhaps the most creative solution Iron Point Financial has to offer its clients right now is something called a dual-direction structured note. Greg explains how that works as follows:
“Maybe it’s an election year. Maybe there are two-and-a-half wars going on the next hemisphere over… Whatever the geopolitical thing is that makes people nervous. And if you’ve got that floating through people’s minds, and they’re getting close to retirement.
So with a dual-direction note: if it’s up, it’s up, and if it’s down, then anything down to, say, 20 or 25%, you get the absolute return of that number. What that means is that if the connected index is negative 12% at the end of your period, you would be positive 12%. Even though everybody else is negative (as the index is down), you get that positive outcome. That works because of how you structure the options.
Right now, we’ve got notes for two different companies paying a 9.5%, 10.5% and an 11% income stream — which are fantastic. Certificates of Deposit (CDs) are 4.6% – 5.3% right now. So our notes are like double that. That’s way more than any textbook will tell you is possible for a ‘safe withdrawal rate’ (usually 3% or 4%).
Now, just because we have something like this on our books as something we can use for your benefit, that does not mean we will. It all depends on your unique investment needs, risk profile and financial goals.
How to Get Started with Risk Managed Investments
Step-by-Step Guide
- Assess Your Risk Tolerance: Understand your risk appetite. Are you willing to take on higher risks for potentially higher rewards, or do you prefer stability? What is affordable for your unique circumstances?
- Set Financial Goals: Determine what you want to achieve with your investments. Are you saving for retirement, education, or a major purchase? Start with the end in mind, and work backwards to the present day.
- Consult a Financial Advisor: A professional can help tailor a risk-managed investment strategy suited to your individual needs, and they can also talk you through the previous steps, in case you need a second opinion.
Selecting the Right Investment Mix
Choosing the right mix of investments is crucial. In our opinion, you would be wise to diversify across asset classes while accounting for your unique risk tolerance and financial goals.
For example, if you are a more risk-averse individual, you might allocate more to bonds and less to stocks. Alternatively, if you have a higher risk tolerance, then you might want to incorporate a balanced mix of stocks, bonds, and alternative investments like real estate.
Regularly Review and Adjust
We do not believe investing should be a one-time activity. You would be well-advised to regularly review your portfolio to ensure it aligns with your financial goals and risk tolerance. It’s important to adjust your investment mix as needed to adapt to market conditions and life changes.
For instance, you might need to rebalance your portfolio at regular intervals, to ensure consistency and alignment with your risk profile. Over time, stock growth can cause imbalances in your portfolio, resulting in higher risks than you may be comfortable with — hence the need to rebalance.
Summary Thoughts
Risk managed investments offer a balanced approach to growing your wealth while minimizing potential downsides. Whether you’re a retiree looking for a stable income or an investor seeking moderate long-term growth, these strategies can help to provide a financial foundation and contribute to the financial confidence you are after.
Ready to take the next step? Why not explore more resources on risk managed investments through the links below or, if you know you need some creative, personalized help getting started, why not reach out to Iron Point Financial today to co-create a strategy that fits your unique needs? Let us help you transform investing into a calculated adventure rather than a shot-in-the-dark gamble.
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Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have security registrations for 22 other states across the continental USA.
Further Reading
Disclosures
- All investing involves risk, including the possible loss of principal.
- There is no assurance that any investment strategy will be successful.
- Re-balancing may be a taxable event. Before you take any specific action be sure to consult with your tax professional.
- Investing in mutual funds is subject to risk and loss of principal. There is no assurance or certainty that any investment strategy will be successful in meeting its objectives.
- Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.
- A diversified portfolio does not assure a profit or protect against loss in a declining market.
- The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value.
- Investors should consider the investment objectives, risks and charges and expenses of the funds carefully before investing. The prospectus contains this and other information about the funds.
