Everyone manages their money daily, but some do a poor job at it while others save and invest wisely. It’s important to avoid certain actions and learn from your mistakes if you hope to find yourself in the second category. We discuss some important wealth management risks to avoid below.
Failing to Diversify Your Portfolio
Most people have heard the term “never put all your eggs in one basket.” In the money management world, this simply means not to rely on a single type of investment or source of income to provide all your financial needs. More specifically, it means to strive for a balanced portfolio. This is especially important when it comes to stocks that pay dividends. The danger in holding too much of one type of stock is that the company issuing it could cut dividends and cause the stock to lose its value. You especially want to avoid this scenario in retirement when you’re living on your investments and social security alone.
Be Certain You Know About Call Risk
When you purchase a new bond, find out if it comes with a provision that allows the issuing company to repay investors early by calling back the bond. An issuing business might choose this option if it would need to pay out a higher coupon amount in the future than it would need to pay by settling with investors at the current rate. While you won’t lose any principal with a called back bond, you could lose a significant amount of interest you had budgeted for retirement if you depend on receipt of a certain coupon rate.
If you require coupon income to help you meet current living expenses, consider investing in exchange traded funds, bond funds, or noncallable bonds instead. This could lower your risk significantly.
Mitigating Business Risk
While it would be nice to have a crystal ball to see how a company will perform in the future, the reality is that no business can guarantee future performance. When a business risk comes to fruition, it means that the company you invested in via stocks, bonds, or another method has experienced one or more of the following scenarios:
- Posted a poor earnings report for the year or the quarter
- Major changes in leadership
- One or more people in the company formally charged with wrongdoing
- Company continues to produce outdated products or services
Because it’s impossible to forecast these risks yourself, the next best thing you can do is set automatic stops or buy a put option to protect yourself from unexpected business risks.
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