As volatility in markets jolt and intraday price swings become more pronounced, many investors are looking at ways to reduce risk in their portfolios. Most investors make the mistake of interpreting ‘de-risking’ as just locking-in gains and cashing out from the market.
But de-risking entails more than just cutting one’s exposure and shifting all their asset allocation to cash. Here are 4 ways investors can lower risk in their portfolios without derailing their long-term plan whilst also staying invested.
1. Hold Some Cash
Cash may be king, but not always and certainly not in excessive amounts in a portfolio. Most investors would automatically flock to cash when faced with higher market volatility or when signs of headwinds appear.
As a safe haven asset class, cash is arguably the safest in its category. But it also offers no real returns or yield and its intrinsic value can be diluted by inflation. Keeping some cash can ensure some form of capital preservation, but the investor also sacrifices yield and could potentially miss out on higher returns when markets rebound.
Holding large amounts of cash also introduces another dilemma when investors plan their eventual entry back into the market. This involves a significant degree of market timing which is near impossible to achieve.
History has shown that investors often never get it right when they attempt to buy at the bottom or sell at the high. In fact it’s usually the other way around because of herding mentality in markets and the presence of algo-traders.
The ideal amount of cash to hold in a portfolio differs from one investor to another. But it typically ranges between 5%-10% depending on the investor’s time horizon and risk profile.