Money Management

One of the most common questions wealth management professionals hear is, “How will you protect my money when the market goes down?”

The implication, of course, is that it’s easy to make money when the market goes up. For a variety of reasons, that’s not entirely true — at least, it’s not true that delivering alpha over benchmark indices is easy when the market is on the rise.

For this reason, wealth management professionals like San Francisco-based financial advisor Daniella Rand encourage clients to look carefully at the totality of prospective wealth managers’ track records — to evaluate their performance not just in years when the market moves down or sideways, but in up years too.

Still, investors have every right to ask wealth managers how they’ll act to preserve their wealth when the market turns. Here’s a general overview of basic wealth preservation strategies for investors — though, as always, you’ll want to speak with your own financial advisor about the suitability of particular strategies.

Portfolio Diversification

Diversification is no guarantee against a decline in portfolio value, but it does insulate against undue exposure to specific market sectors when those sectors underperform the broader market. For most investors seeking some combination of capital preservation and growth, diversification is the norm.

Dividend Reinvestment

Much has been made of the benefits of dividend reinvestment, a common practice for long-term investors seeking growth. Dividend reinvestment is an example of dollar-cost averaging, wherein investors set aside the notion that they can time the market and instead continue to put their money to work without regard for day-to-day market movements. 

Non-Correlated Assets

Two highly correlated assets tend to move in tandem; when the price of one falls, the price of the other generally falls as well, and vice versa. By contrast, the relationship between non-correlated assets appears much weaker. 

Principal-Protected Investments

When you invest in a company’s stock, you’re accepting the risk that your investment could lose value over time, or even become worthless. By contrast, when you invest in a principal-protected investment, your downside risk is mitigated. Your upside may be limited as well, but for investors with lower risk tolerance, that’s probably an acceptable tradeoff.

Don’t Let the Market Scare You

More than any other factor, it’s the prospect of losing unrealized gains — “paper money,” as it’s perhaps too glibly called — that deters many prospective investors from putting their money to work in the market. Savings accounts seem safe, after all; the FDIC ensures that savings balances up to $250,000 are insured against bank failure and certain other eventualities.

Although it’s always wise to have some exposure to cash, and your financial professional can help you determine precisely what that exposure looks like under various life and market scenarios, stuffing your money under the proverbial mattress is usually not the best way to grow — or even protect — your wealth. 

In other words: Don’t let the market scare you. Your financial future may depend on your finding the courage to build and deploy a sustainable financial plan.