Given the increased volatility in financial markets recently — the CBOE Volatility Index (VIX) has soared 45 percent since the S&P 500 hit its record high Dec. 29 — you can't be faulted for worrying about the safety of your retirement investments.
So what should you do?
"I am advising many retired clients to consider a more defensive posture in their retirement portfolio," Steven Gattuso, a senior portfolio manager at Courier Capital in Buffalo, N.Y., tells MarketWatch columnist Robert Powell
"You still want to stay diversified so the adjustments that are currently recommend are tactical tweaks rather than wholesale portfolio changes."
Powell suggests that investors with an average risk tolerance and a time horizon of at least 10 years consider reducing the duration of their fixed-income portfolio. That will provide some protection against rising interest rates.
"This can be done with funds or ETFs [exchange-traded funds] that focus on high-quality shorter maturities or even adding floating rate products to the portfolio," Gattuso notes.
Meanwhile, Wall Street Journal Jonathan Clements
offers several ways of measuring risk for your entire investment portfolio.
- "Allocating Assets," he writes. Calculate what percentage of your portfolio consists of stocks, bonds, cash investments and alternative investments such as gold and real estate. In general, "the more you have in stocks, the riskier your portfolio will be," Clements notes. "But alternative investments and bonds can also boost your portfolio's risk level."
- "Riding the Cycle." Try to determine how your portfolio will perform in different economic environments. "Aim for an investment mix that will fare reasonably well, no matter what happens," Clements writes.
- Small-cap and value stocks historically outperform in the long term, but can mean added risk. "Smaller-company shares usually suffer more than large stocks in a market downturn," he explains. "Meanwhile, value stocks often have shakier finances than growth stocks, so they could generate wretched performance in a bad economic slump."
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