Hello everyone, and welcome back to the Retirement Planners of America Podcast, four ways to manage risk. Now, you know a lot of other podcasts might give you two or three ways. No, we give you the full monty. We give you all four. We’re going all the way, baby. Okay, so we’re not going to mess around here. So the first thing that you know, I think, is important to understand, is that when you’re in, when you invest your money, you’re in the risk game, nobody gives you a return on money if there’s no risk, right? If you want absolutely no risk, go bury it in the back, in your backyard, although you still have termite risk or something, you know, fire, you might still have some of that risk, but in terms of somebody paying you a return on your investment, it’s all based, in almost every case, on how much risk are you taking. The more risk you’re taking, the more reward you would want. Okay, so don’t ever forget that if you are investing, you are in the risk game. So when you do invest, you got to keep that in your mind. And if you do, then you got to think about, okay, so if I’m in the risk game, then how do I make sure that I’m taking the amount of risk that’s appropriate for me? What are some strategies I can use to control that, to manage that, etc, because you don’t want to leave it to chance, because it can come back to bite you if you didn’t understand how much risk you were taking. So we’re gonna talk about four different strategies you know that you could use. One is diversification. So that’s the first one is diversification. So diversification basically means you know, what percentage are you going to have in different asset classes, different kinds of investments, some of them that Zig when others zag. You know, are you going to have technology stocks versus financial stocks? So the composition of your investment portfolio is what’s called diversification. And so there’s a whole science around that. And what we try to do is we call it a an optimized portfolio, which means that for a given level of risk, what’s the highest return that we can get for that level of risk? So that’s a diversification. So that’s number one, number two. And this comes from a study that was done by some guys called Brinson B Bauer back in the 80s, believe it or not, and then, you know, it created a lot of controversy, because at first it was accepted as this is it. We’ve found the holy grail of investing. But then they revisited it, and they found that there they needed to revise it. So 13 years later, in YK, they revised it to where it stands right now. So I want to go over with you basically what they said. So first of all, what they said is that asset allocation represents a vast, vast high percentage of how much risk you’re taking, the returns you’re going to get, and the variability that you have in those returns. So let me explain. So the variability from period to period, meaning, if the if the returns are going to be this in this period versus that period, the allocation, the percentage that you put in stocks, the percentage that you put in bonds, the percentage that you put in large caps, small caps, okay, so this is, it sounds like diversification, but this is asset allocation, okay, you’re allocating your assets within these different asset classes. Diversification is within each asset class. What do you own within that? So that’s a differentiator, okay? So the second thing, then, is your asset allocation. And so basically, they found that 40% of the returns that you get are based on how you allocate your assets, so meaning that if you are 100% in stocks, versus 6040, versus 4060, that is going to impact the return that you are going to get Right. Think about that so it can help. Asset allocation can help, because what we do is we try to figure out, in an interaction with you, and based on our experience and our knowledge, how much risk is appropriate for you, and then what return do you need to make given how much risk is appropriate for you, once we know that, then backing into an asset allocation strategy is relatively easy. Okay, the hard part is figuring out what return do we need to make to satisfy your goals. And if you watch our other podcasts on our core values, one of them is, take only as much risk as is necessary to accomplish your financial goals. So we want to, we want to take the least amount of risk that we can and still accomplish your goals. So whatever that return is, then we can back into what kind of asset allocation should we put together, and then that will give us a high degree of confidence in terms of our returns and the variability of those returns over different periods. So we can. We it’s not guaranteed. Okay, it doesn’t work 100 nothing’s 100% I wish it was, but it does help tremendously towards that. Okay, so that’s asset allocation. Number three is what’s called dollar cost averaging, and this is particularly important, I think, for those of you who are still working, those of you who are putting money into your 401, K’s, you know, out of your paycheck, or maybe you’re funding your IRAs on the side, or, you know, you have a you’re putting money in, as opposed to being retired and taking the money out. Okay, so you’re adding dollar cost averaging basically means that you’re going to put money in every single month like clockwork, or every quarter you know you have some you have a cadence to it that you stick to through thick and thin. Why is this so important? The reason why dollar cost averaging is such a powerful risk mitigator Is that what it does is that as the market you potentially could invest on day one. Let’s say you put all your money in at once, and right off the right off the bat, the whole market goes way down. Okay, so now you lost on 100% of your money. If instead you said, I’m going to put it in over the course of a year, 1/12 at a time. If that happened, then you put in 1/12 the market tanked, and now you’re buying at a lower and lower price, so you’re getting more shares, and as it comes back, those shares that you bought at the lower and lower price, they appreciate faster than the ones you’re buying on the way back up again. So by doing that, you’re mitigating risk. You’re spreading it out and over. Over the long term, it is a it can be not always, because the reverse can happen, of course, but most of the time, this is a very good way to manage risk. The final strategy, number four is, and this is what we believe in. It’s not, I would say the common thought, it’s maybe controversial, and that is that you should have a strategy to sell your investments. If you look at professional traders, the vast majority of them, when they buy an investment, they already have a plan for when they’re going to sell it. Now, do they actually sell it? Maybe yes, maybe no, but they know in advance, when I buy this investment, when it reaches some number, either up or down, I’m going to sell it now, when it reaches that number, then they make a new decision, do I sell it? Do I keep it? But they’re making a brand new decision. They don’t just let it ride. They don’t just buy and hold for the most part, the problem is that retail investors, which I presume you are, if you’re watching this, you’re told to buy and hold forever, regardless of what happens. Now, I guess I’m dating myself, but I went through y, 2k I went through 2008 with with our clients, and I can tell you that those things are very, very detrimental to your financial health. Okay, the 2008 was a 57% drop from peak to trough. Imagine if you lost 57% of your money over the course of just a short period, a few months. I mean, that’s heart wrenching. It’s like a lead balloon in your stomach that you can’t it’s horrible. And in in the.com crash in year 2000 same thing there. The market went down 49% from peak to trough, and it was a two and a half year endeavor. You know, it was hell for people who went through that. Now we haven’t gone through one in a long time. So obviously this will never happen again. I get it, but on the off chance that it does. You know the old expression is History doesn’t repeat itself, but it rhymes. So we believe that buy and hold is a is an incomplete strategy. It’s two legs of a three legged stool. We believe that you should also mitigate the downside of your risk with a strategy that says this is where I’m going to sell if I get to that point, okay, and it’s very important. And in other podcasts, we’ve talked about our magic, your magic number, and protecting that, and that’s part of that strategy. So mitigating risk. Number four here is, have a strategy to admit it, to stop the losses and stop losses. Look it up, Google it, you’ll see it is something that professional traders use, but for some reason, which I’ll let you try to figure out on your own, you’re not supposed to do that. You’re supposed to buy and hold no matter what happens, which we think if you’re within five years of your retirement, or you’re in the first five years of your retirement, if you’re in that decade, we think that’s just a terrible idea. It could be significantly detrimental to your financial health. So there you have it. Those are the four ways to manage risk. I hope you had as much fun watching this as I had doing it for you. And I also hope this found you healthy, wealthy and wise, and we’ll talk soon.