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Highlights
- De-risking, first, primarily involves discerning realistically where your portfolio stands in terms of your risk ability
- The closer you get to your goal, the more you have to lose
- It is best to de-risk in a staggered fashion rather than in one fell swoop
In late November/ early December, in the wake of the World Health Organization identifying the Omricon Covid variant as a “variant of concern”, the Canadian stock market witnessed a fall. Arguably, some of this is owed to investors de-risking.
What is de-risking?
De-risking, first, primarily involves discerning realistically where your portfolio stands in terms of your risk ability. So, say you are relatively young and have a long way to go before retirement, your risk ability is higher than it will be closer to retirement. Effectively, you can afford more exposure.
The closer you get to a set goal, for example, retirement, sending your kid to college, etc., the lesser is your risk ability. The effort to lower/ manipulate your exposure relative to your risk ability, may be labeled de-risking.
When to de-risk your investment portfolio?
As alluded to earlier, the closer you get to your goal, the more you have to lose. If you have scored equity gains for many years with relatively little change to your investment approach, it may be worth looking at de-risking a little bit considering you have more to lose now.
Also read: 10 best Canadian blue-chip stocks to buy & hold forever
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How to de-risk your investment portfolio?
1. Moving from stocks to bonds
One way of de-risking is to may be look at lesser-returning but more stable bonds instead of stocks. Perhaps, it’s best to do this in a staggered fashion rather than in one fell swoop to protect against volatility.
2. Diversify into other geographies
Another way to do this is by investing in equities in other geographies. Doing this is akin to putting your eggs in different baskets instead of one.
3. Better quality stocks
Rather than courting highly rewarding stocks with comparatively increased volatility, it may be in your interest to look at well-established, consistent stocks that boast a good record over decades, for example, stocks of Canada’s ‘Big Five’ banks, FAANG stocks, etc.
Also read: Canada’s Big Five bank stocks to buy & hold long term
Bottom line
Though not necessarily, it can be expected that you see diminished returns as you de-risk your portfolio. But maximum returns aren’t the priority, rather lowering risk, given that you are much further along the timeline. Bear in mind, risk is never eliminated, only reduced and every investment or re-investment merits a copious amount of homework.
