Managing Your Portfolio Risk

As an older investor, you need to manage your portfolio risk to get it as low as possible without lowering your potential investment earnings

. Today, there may be many alternatives to corporate bonds and government bonds, although you will be significantly increasing your portfolio risk with these high-yields options. If you and your investment advisor think that your finances are sound enough to take on additional risk, weigh how each of these investments affect your portfolio. Also, some experts recommend that you think of your entire portfolio as partitioned into a couple of buckets: the first for urgent expenses you may encounter in the next five years, and the other to result in income you can use towards less immediate long-term expenses.

The second bucket should contain higher-yield, relatively riskier investments, while the first needs to have reliable, safer investments. As for the profit of investment in the first bucket, yields above 1% will do, although rates of return such as these may seem trivial. The truth is, today, average yields on some mutual funds in the money market are much less than 0.1%, and somewhere around 0.15% for Treasuries lasting three months. Money-market bank accounts may make more, ranging from 0.65% - 0.94% depending on the amount deposited, but it still does not reach that seemingly paltry 1%.

Investors can do much better nowadays with other options, such as the 1.3% annual yield you can get from American Express Bank, or the 1.21% Wilmington Trust unit WT Direct gives on your deposit. You can also consider short-lived bond funds due to the higher gains you can get, although rising interest rates will cause these funds to waver just think of bond funds like these as a second liquid fund for expenses you will encounter within nine months to a year. You should also observe the underlying investments these funds work with, as events such as the collapse of the credit market battered short-fund investors because of their relation to securities backed by mortgages.

Senior investors who want to strengthen their investment portfolios and boost their retirement finds may find it difficult to earn more without taking on more risk. However, you can still find ways to make good money while keeping portfolio risk manageable, such as using the described two-bucket method to help you re-allocate your assets and investments and classify them according to the expenses they will be used for when you retire.

by: Katherine Smith

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