How to Leverage Riskier Assets to Lower Your Portfolio Risk

Investing is like cooking. You need the right ingredients, proportions, and temperature to make a tasty dish. If you use too much or too little of something, or cook it wrong, you may get a bad result.

The same goes for your investment portfolio. You need to balance different assets, such as stocks, bonds, and cash, to get your desired return and risk. If you use too much or too little of an asset, or hold it wrong in the wrong account, you may get a less than ideal outcome.

One challenge that investors face is how to use riskier assets in their portfolio. Riskier assets are those that have high returns but also high volatility and uncertainty. Examples are individual growth stocks, emerging market funds, cryptocurrency, or options.

Riskier assets can boost your portfolio returns in the long run. But they can also cause large losses and stress in the short term. So, you need to be careful and smart when using them in your portfolio.

Here are some tips on how to leverage riskier assets to lower your portfolio risk:

• Know your risk tolerance and time horizon. Before using any riskier asset in your portfolio, you need to know your risk tolerance and time horizon. Risk tolerance is how much risk you can stomach with your money. Time horizon is how long you plan to hold your investment before you need it. Generally, the higher your risk tolerance and the longer your time horizon, the more you can allocate riskier assets in your portfolio.
• Use the core-satellite approach. A core-satellite approach is a way of dividing your portfolio into two parts: a core and a satellite. The core is the bigger and steadier part of your portfolio that has low-risk and diversified assets, such as index funds or ETFs. The satellite is the smaller and more exciting part of your portfolio that has high-risk and concentrated assets, such as individual stocks or options. The core gives your portfolio stability and safety, while the satellite gives your portfolio opportunity and thrill.
• Use a small percentage for riskier assets. The key to leveraging riskier assets in your portfolio is to use them sparingly and wisely. A common rule of thumb is to use no more than 5% to 10% of your total portfolio value for riskier assets. This way, you can limit your downside risk and still enjoy the upside potential of these assets.
• Diversify within riskier assets. Just as you diversify across different assets in your core portfolio, you should also diversify within riskier assets in your satellite portfolio. This means that you should not put all your money in one risky investment, but spread it across different investments that have different risks and returns. For example, if you use individual stocks, you should not buy only one stock or only stocks from one industry or country. You should buy several stocks from different industries and countries that have different growth prospects and risk profiles.
• Rebalance regularly. Rebalancing is the process of adjusting your portfolio back to its original or desired allocation by selling some assets that have gone up in value and buying some assets that have gone down in value. Rebalancing helps you keep your target risk level and take profits from your winners while buying more of your losers at a lower price. You should rebalance your portfolio at least once a year or whenever there is a big change in the market or in your situation.

It is important to note that risk tolerance is usually at the portfolio level or at least account level, not each position. This means that you should not judge each investment “in a vacuum”, but see how it fits into your whole portfolio and how it affects your overall risk exposure. For example, if you have a well-diversified core portfolio that has mostly low-risk assets, you may be able to use some higher-risk positions in your satellite portfolio without going over your risk tolerance.

However, some advisors may miss this point and focus only on one or two risky positions in an account and say that it means it is too risky. While this can be true sometimes, it can only be said for sure if that position is looked at in the context of the whole account or portfolio. One small position in something aggressive while 98% of the portfolio is very conservative does not necessarily mean that account or even that position is too aggressive. It may just be a way to leverage riskier assets in smaller portions or allocation to decrease the risk of the overall portfolio as those smaller portions may take less capital to achieve the same results; thus allowing for more capital to be available for the more conservative investment options.

By following these tips, it is possible to leverage riskier assets in your portfolio without burning it. You can add some spice to your portfolio and get potentially higher returns in the long run while keeping your risk under control.

At LaCour Wealth Management of Raymond James, we specialize in giving second opinions to clients who already have a financial advisor. We can help you check your current portfolio and give our honest feedback and suggestions.

If you are interested in getting a second opinion on your portfolio and investment strategy, please contact us today. We would love to hear from you and see how we can help.

This blog post was created with the help of Bing Chat Enterprise, an AI-powered chatbot developed by Microsoft.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of LaCour Wealth Management and not necessarily those of Raymond James.

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Please note that this blog post is for informational purposes only and is not intended as investment advice. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Prior to making an investment decision, please consult with your financial advisor about your individual situation.