subject: Balancing The Risk And Rewards Of Your Portfolio [print this page] In today's world of financial crisis, one after another, and the pace of change in the economy fueled by technology, investors must look for new and innovative ways to balance the risk/reward relationship in their portfolios. Although some of the old methods of doing this such as asset allocation, covered calls, stop loss, and shorting the market still can be effective, there are other methods that allot of investors are not that familiar with.
The first one I would like to talk about is the index annuity. Index annuities have the potential of giving the investor growth potential that is linked to various market indices such as the S&P 500, EAFE, Corp. Bond Index, and others, without any risk to the investors principal. Now granted there is no way to get 100% participation in these indices without risk, however getting on average somewhere between 50% to 70% participation depending on the formula and the monthly returns of the index, can be pretty attractive when your principal is guaranteed.
Another twist on the insured approach using annuities is what is called guaranteed minimum withdrawal benefits on a variable annuity. This strategy does not protect your principal, however it does guarantee and lock in your future income each year. Once that is locked in that benefit cannot go down if you follow the annuity contract rules. This way you can get almost full market growth potential, have your future income values locked in every year, and have a minimum annual growth guaranteed regardless of what the performance is.
And finally another approach investors should know about is based on University of Chicago research regarding how markets perform over time. It involves combining the traditional allocation approach with institutional asset class mutual funds that spread risk over the entire global market. Although this strategy does not protect investors from loss, based on past historical performance data, it does help reduce risk and create more portfolio efficiency! When looking at your overall portfolio strategy, remember that the old tradtional view may not work that well in today's environment!
I believe utilizing all of these strategies in various percentages depending on you goals, time horizon, and risk tolerance should be a serious consideration the next time you talk to your advisor, or put your new strategies in place yourself if you are working on your own! It could make a huge difference in the long run.
