Your Portfolio: Risk vs. Protection

By Carissa P. Elrick   •   PGI Financial Services, Inc.

During meetings with your financial advisor, portfolio risk is often discussed more reactively than proactively – reactively usually being when there is a very volatile stock market. Enter 2022.

When thinking about investing, are you more focused on potential gains or potential losses? Which is more important? Depending on what stage of life you’re in, it might be one or the other. However, there’s an important place for both in your portfolio at any given time. If you’re not putting much focus into wrapping your arms around your growing nest egg, maybe it’s time that changes.

We spend our lifetimes working and accumulating, accumulating, accumulating. At some point, the narrative changes. When the paychecks stop, we become more focused on protecting what we’ve worked so hard to build. Even in the protection phase, we want our assets to continue to grow at a reasonable rate – maybe just taking on less risk.

One way to address this risk vs. protection dilemma is by using a financial planning strategy that breaks your assets up into 3 different buckets:

Green – The green bucket is your cash bucket. Everyone should always have an adequate emergency fund on hand. This looks different for everyone but is usually somewhere between 3-6 months of living expenses. It will look much different for someone who is a small-business owner, or someone who owns and manages rental properties, for example.

Blue – The blue bucket consists of your indexing accounts. These are annuities that give you the ability to grow your assets conservatively, while not losing when the market goes down. This bucket allows you to create streams of lifetime income for you and your spouse, and oftentimes allows that income to increase for a period of time if you find yourself needing long-term care. You’re giving up some growth in this bucket, but for the ever-important protection for a portion of your assets.

Red – The red bucket is your market-based money. When the market goes up, you make money. When the market goes down, you lose money.  A huge misconception when it comes to investing is that taking on more risk is the path to bigger gains. There are ways to invest in the market that utilize technology and take a quantitative approach, allowing you to achieve gains in the market, while also protecting the downside to some degree. In a volatile stock market, it becomes critical to have an approach like this be a part of your portfolio.

The breakdown of what percentage of your assets should be in each bucket is different from person to person. There is no cookie-cutter approach to ensuring that you have the right amount of portfolio risk for you. The important thing is that you have a plan to address this, and that plan evolves as your life unfolds.

Carissa P. Elrick is a Financial Advisor at PGI Financial Services, Inc.

This article was featured in the March 2022 issue of Carolina Bay Neighbors magazine.


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