Investors are rediscovering the risk associated with investing as the stock market declines for a significant portion of 2022. Unfortunately, whether or not your money is invested, it is always susceptible to some kind of loss. In order to build an end-to-end portfolio that is more effective for you, it is crucial to put different portions of your money to work. Although risk cannot be completely eliminated, it can be managed in a way that increases your chances of success in general.
You must prioritise risk management in your plan if you want to increase the overall resilience of your portfolio. The assets listed below may not seem like much taken individually, but taken as a whole, these three options bring your overall portfolio one step closer to becoming unstoppable—even in this market.
No. 1: Cash
It may seem unusual to think of money as unstoppable, especially in a time when inflation is raging. Despite this difficulty, cash has one significant benefit over other asset classes: You utilise it to pay your bills. Additionally, it serves as the standard by which other assets are judged. As a result, despite this year’s terrible performance of cash when compared to inflation, it has outperformed stock market investing by a wide margin.
Of all, if cash outperforms stocks over the long term, we all have much more important issues to consider. As a result, it’s crucial to have some money on hand but also to exercise restraint. A decent rule of thumb is to have enough money on hand to cover your monthly expenses plus an additional three to six months’ worth of expenses saved up in case one of those horrible “life happens” occasions occurs.
If you spend far more than that, you run the risk of having an excessive amount of your money exposed to inflation. Much less will put you at a higher danger of needing to sell your assets at a loss to pay an unforeseen expense.
No. 2: High-quality bonds
Stocks might be a very risky location to put your money if you have bills that you need to pay in the next five to seven years. After all, if the market declines (as it did in 2022) and you rely on selling your stocks to pay your expenditures, you will be need to sell an additional number of shares to satisfy your expenses.
Bonds have a number of significant advantages versus equities when it comes to money you’ll need soon. First, regular interest payments at predetermined dates, followed by a principal repayment at maturity, are characteristics of ordinary bonds. Bonds are therefore far more suited than equities for duration matching, which is the process of converting an investment into cash immediately before you need it.
Bond payments also take precedence over equity dividends. It usually results in bankruptcy and the possible transfer of the firm’s assets to the bond holders if a corporation misses a bond payment due. Therefore, it is likely that a corporation will make its bond payments if it is able to do so.
However, a company’s capacity to pay its bonds depends on both the health of its balance sheet and its capacity to generate cash. So keep an eye out for such and stick with businesses who seem capable of making those payments going forward to increase the likelihood that your bond investments will be truly unstoppable.
The main disadvantage of bonds is, of course, that they often have limited total returns due to their largely fixed cash flows and known duration. As a result, bonds are not frequently excellent long-term wealth-building vehicles, despite the fact that they can frequently offer better yields than cash for those short-term needs.
No. 3: Broad-based stock index funds
Despite the obstacles we face in 2022, there are solid grounds for optimism that equities will remain an excellent means of long-term wealth accumulation.
Broad-based, low-cost index funds that invest in stocks typically beat actively managed mutual funds over the long term. Because of this, broad-based stock index funds are a very effective long-term investment option.
However, as 2022 serves as a reminder, the stock market might experience both gains and losses. Stocks are not the place you want to hold money that you need to spend soon, however how unstoppable they may be in the long run.
Put them all together for a far stronger portfolio
Cash, bonds, and stocks each have trade-offs and hazards that make them unsuitable as your only investment vehicle on their own. But when you combine them and consider when you’ll need the money you’re saving, they each become the cornerstones of a much more unstoppable portfolio.
There is no better moment to start than right now if you’re prepared to put the puzzle together for yourself. Set a deadline for when your end-to-end portfolio will have a higher chance of satisfying your needs. Make it a priority today.