When and how to reduce the risk of your investment portfolio?

In late November / early December, following the World Health Organization’s identification of the Omricon Covid variant as a ‘worrying variant’, the Canadian stock market experienced a drop. Arguably, this is partly due to reduced investor risk.

What is harm reduction?

Risk reduction, first of all, is all about realistically discerning where your portfolio stands in terms of risk capacity. So let’s say you’re relatively young and have a long way to go before retirement, your risk capacity is higher than it will be closer to retirement. Sure enough, you can afford more exposure.

The closer you get to a defined goal, for example, retirement, sending your child to college, etc., the lower your ability to take risks. The effort to reduce / manipulate your exposure relative to your ability to take risks can be termed risk reduction.

When to reduce the risk of your investment portfolio?

As mentioned earlier, the closer you get to your goal, the more you have to lose. If you’ve been making equity gains for many years with relatively little change in your approach to investing, it may be worth reducing the risk a bit since you have more to lose now.

Read also : 10 Best Blue-Chip Canadian Stocks To Buy And Hold Forever

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How to reduce the risk of your investment portfolio?

1. Switch from stocks to bonds

One way to reduce risk is to look at less profitable but more stable bonds rather than stocks. It may be better to do this in a phased fashion rather than all at once to hedge against volatility.

2. Diversify into other geographic areas

Another way to do this is to invest in stocks from other geographies. Doing this is like putting your eggs in different baskets instead of just one.

3. Better quality actions

Rather than wooing high-paying stocks with comparatively increased volatility, it may be in your best interest to look at well-established, consistent stocks that have performed well over decades, for example, stocks of the “big five” Canadian banks. , FAANG shares, etc. .

Read also : The Big Five Canadian Banks Must Buy And Hold For The Long Term

At the end of the line

Although not necessarily, you can expect returns to decline as you reduce the risk in your portfolio. But maximum returns are not the priority, but rather risk reduction, given that you are much further down the timeline. Keep in mind that risk is never eliminated, only reduced, and that every investment or reinvestment deserves a plentiful amount of homework.

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