In this blog, we’ll discuss a topic that I feel is very important for high-income earners in Paramus, New Jersey: a deeper understanding of investment risk.
Why is investment risk so important? The answer is simple—because the stakes are so high. The more you have accumulated during your working years, the more you potentially have to lose in your retirement years. And, as you age, your earning window may narrow as you get closer to retirement. You should clearly understand how various risks, such as inflation or market volatility, can impact your wealth.
- Market Risk: The ongoing threat that market conditions may move against you
- Credit Risk: The chance that an entity you invest in defaults or fails to meet its financial obligations
- Liquidity Risk: The risk that you may not be able to convert your assets into cash as quickly as you’d like
- Inflation Risk: The often-overlooked risk that your returns may not outpace rising prices, eroding the value of your assets over time
- Financial Risk: The risk that your assets may be vulnerable to outside entities or unexpected events, such as legal claims or health care expenses
Market risk can act like an invisible tax on your investments by seriously eroding the value of your assets, diminishing your financial stability, and reducing your capacity for long-term wealth accumulation.
To effectively tackle this risk, the knowledge of a Paramus CFP® can be invaluable. By leveraging sophisticated investment risk management techniques, you can construct a portfolio that helps minimize market volatility’s impact.
One approach is to diversify asset classes; don’t just stick with equities; include other assets like bonds, real estate, or commodities to help offset stock market shocks.
Another strategy is employing hedging mechanisms like options or futures contracts to counterbalance the risk of potential losses.
While there’s no way to eliminate market risk, partnering with a wealth management firm in Paramus, NJ, can help assist in limiting your exposure to market volatility.
Credit risk is another financial risk that can quietly erode the value of your investment portfolio. This type of risk occurs when an entity, such as a corporation or a sovereign nation—defaults on its debt obligations, affecting your investments in that entity.
The potential fallout can be substantial if you have exposure to bonds, fixed-income securities, or even alternative investments tied to specific businesses.
A multifaceted approach to investment management is critical to reduce the impact of this risk.
Some investors use credit derivatives to hedge against potential losses. Another tactic involves opting for investments with shorter maturities, which typically bear less credit risk than their longer-term counterparts.
Exploring alternative investments—like private equity or commodities—can help further reduce exposure to credit risk as these asset classes generally don’t correlate with the credit markets, providing an added layer of insulation for your assets.
The last tactic is to have focused conversations with your Paramus wealth management team so you know your tolerance and capacity for taking risks.
In simple terms, liquidity risk is the inability to quickly convert your assets into cash without significantly losing market value. If you find yourself in a situation where you need to free up capital quickly—whether due to market fluctuations or personal needs—and your investments are not readily convertible to cash, you face a liquidity risk.
This risk becomes even more pronounced if you have invested in alternative investments, such as private equity or real estate, which may require a more extended exit strategy than stocks or bonds.
These potential events can tie up significant portions of your invested capital, which, when needed immediately, can cause steep losses when you sell.
Liquid assets like Treasury bills or specific money market instruments can cushion a short-term need for cash. That’s why you and your Paramus financial advisor need to assess and adjust the liquidity profile of your portfolio regularly.
An experienced Paramus wealth management team can also help utilize advanced tactics like hedging through derivatives or setting up credit lines backed by your investments, which are frequently used strategies to help combat liquidity risk.
Simply put, when inflation rises, every dollar you have invested buys you less goods and services in the future. The corrosive impact of inflation can gradually dilute your portfolio’s real returns, causing potential damage to the pursuit of your long-term financial goals.
One approach to help minimize this risk is using alternative investments with a track record of outpacing inflation. Real assets like income-producing real estate or commodities can offer a hedge against rising prices. Additionally, Treasury Inflation-Protected Securities (TIPS) can adjust your principal by changes in the Consumer Price Index, offering some inflation protection.
Another viable strategy is to focus on equities with strong pricing power. Companies that can pass on consumer cost increases are better positioned during inflationary periods. These equities can offer better real returns, helping to shield your investments from the erosive impact of inflation.
Using the services of an experienced Paramus wealth management firm can offer tailored investment risk strategies focused on your goals, circumstances, concerns, and tolerance for risk.
Without the proper insurance coverage, you’re leaving a significant portion of your wealth—and potentially your health—exposed to what we refer to as financial risk.
- One alternative that is often overlooked is an umbrella liability insurance policy. This policy comes into play when you need more than your home’s or auto insurance’s liability limits. Wealthy individuals and their families are attractive targets for lawsuits, and umbrella liability policies can protect your assets from being impacted by relatively substantial claims.
- Consider specialized property insurance for valuable items such as art collections or rare automobiles. Standard homeowner’s policies typically won’t suffice for these unique asset classes.
- Another layer of protection centers around health and long-term care insurance. A serious illness can have the dual impact of draining your financial assets while also decreasing your ability to earn income. Top-tier health insurance policies and critical illness riders can provide coverage that minimizes the out-of-pocket expenses related to potentially catastrophic medical events.
- On the investment side, pay attention to the role of alternative investments in mitigating risk. Real estate, commodities, and hedge funds can act as a buffer against market volatility. Some of their performance characteristics can be offsetting.
Why Consider Integra Wealth Management
Wealth management isn’t simply about investing your funds in a portfolio of securities and hoping for the best. It should be a multifaceted, thoughtful process incorporating budgeting, tax optimization, estate planning, and insurance coverages.
Integra Wealth Management’s philosophy revolves around crafting personalized financial game plans that align seamlessly with your individual life goals and circumstances. By adopting this comprehensive approach, we’re not just helping you manage your money but empowering you to pursue true financial independence.
Managing your money can sometimes feel like an overwhelming task. But with Integra Wealth Management by your side, you’re not alone in this journey. Our dedicated team of wealth managers employs a 360-degree approach to your finances, helping to ensure that every aspect of your financial life is considered and planned for.
Connect with us to schedule an introductory call or meeting.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Stock investing includes risks, including fluctuating prices and loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Treasury Inflation-Protected Securities, or TIPS, are subject to market risk and significant interest rate risk as their longer duration makes them more sensitive to price declines associated with higher interest rates.
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Please keep in mind that insurance companies alone determine insurability and some people may be deemed uninsurable because of health reasons, occupation, and lifestyle choices. Guarantees are based on the claims paying ability of the issuing company.