After a record 2020, many market forecasters are predicting a pull back in 2021. However, there are just as many predicting the market will continue its historic rise. The truth is no one really knows and the outcome for 2021, will be determine by factors we can’t control. Whether they are political, economic, health issues (like 2020), inflation, taxes, and a number of others all we can do is guess.
So how do you protect your portfolio from market volatility? Here are a few suggestions:
- Asset Allocation – Making sure your portfolio has the right amount of stocks, bonds, cash, and alternative investments is always a good start. This is extremely important if you had a profitable 2020. Your allocation probably needs to be rebalanced. Further, your ideal allocation may have changed due to your needs and concerns. It might be a good time to schedule a review and complete a Risk Tolerance Questionnaire to compare your ideal asset allocation to your current asset allocation.
- Diversify – not just your individual investments, but also the types and markets. For example, in your portfolio do you have assets in the stock market? The bond market? The real estate market? Cash? Again, a review of your current portfolio would be the starting point.
- Downside Controls – There are ways to be invested in the stock market but limit the downside. Using “defined outcome” investments, the downside of the market can be covered anywhere from a-9% up to -30%. This is done by “capping” your upside. For example, a typical -30% buffer might come with a +7.5% cap. So, money in this investment has the potential to earn 7.5% but will absorb the first -30% of the market downside. This is just one strategy to control the amount of market downside your portfolio has exposure to.
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