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Part III - How Do I Manage Risk? the Buy and Hold Strategy

This is a multi-part series of understanding and managing risk - see Part I and Part 2.


Buy and hold investing is the preferred method of investing for most people. As with any strategy, there are pros and cons. It is often interpreted as "Buy and forget" rather than buy and hold. The whole premise behind the buy and hold strategy is to buy good investments and hold them for the long-term no matter what the market is doing. The traditional method of buy and hold does not encourage ongoing risk management of any kind. That is my biggest problem with the strategy. I think you have to continually keep an eye on risk management. My preference is buy and hold with an ongoing risk management plan in place.


There are several ways to manage risk in your retirement investments. I am just going to mention one way to increase or lower your risk level in your portfolio. Every mutual fund has a risk level assigned to it called Beta. This is EXTREMELY easy to understand. For purposes of this explanation, lets use Beta and risk level as interchangeable words.  


  • If a mutual fund has a Beta or a risk level of 1, then it is taking the same amount of risk as the stock market.

  • If a mutual fund has a Beta or a risk level of greater than 1, it is taking more risk than the stock market.

  • If a mutual fund has a Beta or a risk level of less than 1, it is taking less risk than the market.


So if you want to increase or decrease the amount of risk on your mutual fund, you raise or lower your Beta or risk level. For example, say you have a risk level or Beta of 1 and you are not comfortable taking the same amount of risk as the stock market. Then lower the Beta or risk level to .5. That means your risk level of 1 is cut in half and you are taking 1/2 of the risk of the stock market. 

 

How do you do that?


If you are working with an adviser, inquire what your beta is for your overall portfolio or set of mutual fund investments. Then decide what risk level or Beta you are comfortable with. Do you want to be taking 1/3rd of the risk of the market or 1/2 or 60% of the risk? Then have your adviser lower the risk level or Beta of your portfolio to be replacing higher Beta funds with lower Beta funds. YOU SHOULD BE ABLE TO DO THIS WITHOUT GENERATING NEW FEES OR COMMISSIONS.


This is a general way to evaluate and manage risk. It is a way and not the way. There is nothing that works 100% of the time. In addition, just because a Beta or risk level is a certain low number doesn't guarantee you are not going to lose money.


If you want an analysis of your risk level, go here to take our risk survey.


If you want a second opinion on your retirement goals and investments, sign up for my complimentary meeting either over the phone or in person. My assistant, Heather can set it up for you by emailing her at heather@prudentmoney.com or call 972-386-0384.