What do I gain by managing downside risk in a portfolio?

You can…

  • Increase safe withdrawal rates.  By reducing your portfolio risk relative to its return, you may be able to withdraw a larger amount during retirement. This doesn’t necessarily mean that you need to invest a sizeable portion of your portfolio in fixed income. Strategies such as tactical asset allocation (TAA) may decrease risk and allow larger safe withdrawal rates, while earning stock-like returns. TAA strategies systematically invest in different asset classes based on specific rules.
  • Avoid behavioral issues.  Compounded returns are very dependent on when your money is invested.  A common concern: if you were to invest today, are you investing at the top of the stock market?  With a lower-risk portfolio, you can invest with greater confidence and avoid making behavioral/psychological errors.
  • Maintain dry powder.  An investor who preserves assets with a lower-risk portfolio is better prepared to take advantage of rare (but attractive) opportunities after the broad market has fallen.
  • Use leverage.  By understanding and lowering portfolio risk, you may increase leverage to achieve a higher return through a broker margin loan or by using derivatives (i.e., futures and options).