I often get the question about what we should be doing now that the U.S. domestic stock market appears to be fully valued, if not overvalued. While recent history is clearly going to show us our biggest winners, it is really important at times like these to re-evaluate how much risk you are actually exposed to today.
Highly diversified portfolios – such as portfolios including ETFs and mutual funds, and/or many, many individual stocks or bonds – are generally subject to less risk than concentrated portfolios -only a few individual stocks – are. At the same time, investors always face market risk (the possibility that stock or bond markets will decline over short, medium or extended periods) and inflation risk (the possibility that investors many not earn enough on their money to keep up with inflation and preserve the purchasing power of your savings).
One of the keys to successful investing is to have a discussion with you financial advisor and to ask them to provide you with an analysis of the amount of downside risk that you have exposure to in your portfolio today. All to often, investors tend to focus on maximizing annual rates of return without properly understanding the downside risk that we are exposed to. And, the closer you are to retirement, the more important it becomes to reduce your downside risk.
We often counsel our clients that taking any more risk than is absolutely necessary with your retirement savings is more similar to gambling than it is to prudent investing. Especially when you consider the incredible climb that the stock market has seen over the last 8 years since it bottomed in 2009, it should become more clear that now is a great time to review and perhaps reduce the amount of risk that you have in your portfolio.
This article was written and provided courtesy of Vaughan Scott, MBA, CPWA®, Managing Director – Investment Officer with Axiom Financial Strategies Group in New Albany, IN. Visit our website to learn more www.AxiomFSG.com.