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Manage Risk in Your Investment Portfolio

December 7, 2022
Bryan McCaulley
Bryan McCaulley

In a perfect world, we’d all enjoy 10% returns on our investments and never face the risk of losing money. We would easily live by Warren Buffett’s rules of investing: Rule number one, never lose money; rule number two, never forget rule number one. Realistically, however, in the real world, investing risk is as certain as death and taxes. The goal, then, is to manage risk in a way that puts the odds in your favor.


Manage Risk in Your Investment Portfolio


Understand the types of portfolio risk

Many factors go into assessing risk and evaluating the relationship between risk and reward within a portfolio. This can involve examining risks of the market through expected returns, standard deviations and asset correlations; concentration risk in a specific company or industry; liquidity necessary to fund disbursements; time horizon; reinvestment; and many more.


Despite the myriad ways to view risk, you can get a general assessment of your investment portfolio by watching for a few primary types.


Market risk. Also referred to as systematic risk, market risks are hazards presented to the entire investment landscape that could impact the value of all or most of a person’s investments at once. These might include a general market downturn; changes in financial conditions due to inflation, deflation or interest rate policy; geopolitical factors or changes in the regulatory environment.


Asset and industry-specific risk. Different assets, industries and asset classes have different inherent risks. If a portfolio is concentrated in any one of these, and the investment type loses value, the entire portfolio can take a significant hit. Asset and industry risk often go hand in hand, since a specific stock will generally have a similar exposure to their industry as a whole. This can even apply to multiple industries or asset classes if a portfolio is over-exposed to assets sharing similar underlying factors or characteristics. For instance, a portfolio may be over-exposed to growth stocks, to small cap stocks or to a specific factor, such as interest rate sensitivity.


Liquidity and time horizon risk. The timing and duration of withdrawals is an important consideration, as specific types of investments may not be able to be sold at a fair price when funds are needed. Additionally, if an unforeseen event were to occur, you may need access to cash that you were expecting to have invested for the long term.


The level of detail one can dive into is astounding, and the risks presented above are just a snapshot into investment considerations. An in-depth portfolio review can help identify your potential investment pitfalls and manage them towards your specific needs and goals.


Take steps to manage portfolio risk

The goal of managing an investment portfolio isn’t to eliminate all risk, and market risk can provide the potential return to achieve your desired goals and outcomes. Taking appropriate and calculated risks provides the highest opportunity for success with the least chance of shortfalls.


While market risk cannot be completely eliminated, having a well-diversified portfolio is one of the most basic yet most effective ways to manage risk. That includes diversifying into different assets, industries, asset types and even underlying characteristics of the portfolio.


Sticking with an investing plan long-term is also important, and understanding your personal risk tolerance can help you stick to that plan. Constructing a plan that aligns your capacity and tolerance for risk is vital, as there will always be unexpected ups and downs in markets, and most investors will have moments where they’re scared. Historically, however, short-term events tend to right themselves over the long run, so staying invested provides a better chance of success.


You might be someone who doesn’t mind taking more risks for the chance of higher rewards, or you might prefer taking the least risk possible. Finding what works for you both financially and emotionally can help you handle the future highs and lows. Jumping off the roller coaster in the middle of the ride all but guarantees poor results that could have serious consequences to your investments for decades to come. Additionally, simply not investing can be a major risk itself, as few people have the ability to reach their goals by keeping their funds strictly in cash.


Having a plan also does not mean that you are unable to adapt and make changes into the future. Reviewing your plan with your advisors over time and as your situation changes should increase your odds of success and your personal comfort level with your investments. For instance, potentially reducing stock holdings as retirement approaches or having increased cash available when a significant life event occurs are a couple of situations to consider.


How we can help

Understanding the risks of your investment portfolio and finding ways to manage those risks can give you peace of mind, knowing you’re on track to the results you want within risk parameters that won’t keep you up at night. Your Hancock Whitney team can help you identify and establish your long-term goals. This includes assessing your risk to determine a portfolio that balances the risk and reward to meet your long-term goals. Contact us today for a personal discussion.


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The information, views, opinions, and positions expressed by the author(s), presenter(s), and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.

This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.

Hancock Whitney Bank offers investment products, which may include asset management accounts, as part of its Wealth Management Services. Hancock Whitney Bank is a wholly owned subsidiary of Hancock Whitney Corporation.

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