Stephen Ahern
High earners have many investment opportunities, which means they’re also vulnerable to investment risks. Anticipating potential drawbacks is part of making well-informed investment decisions. There are several good risk management strategies your advisors may recommend when crafting your portfolio—here are some of the strategies you might discuss.
5 STRATEGIES FOR MITIGATING INVESTMENT RISK
- Ensure you’re clear about your true personal investment risk tolerance.
Of course, not all high earners share the same feelings about investment risk. Some people feel comfortable taking big swings on risky investments because they feel they can always earn more money if an investment fails. Others are focused on steady growth and prefer a more traditional mix of stocks and bonds.
Deciding how and when to take investment risks is highly personal. You should always be comfortable with your choices and feel well-informed about the possible outcomes, especially when investing in something that could be considered high-risk. Being clear about your comfort level with investment risk allows you to make investment decisions aligned with your long-term financial goals rather than being led by impulse or a desire to follow the crowd.
- Prioritize tax planning with all investment decisions.
Capital gains strategy should always be a core part of investment planning for high earners. Short-term gains (from the sale of investments you’ve owned for under one year) are taxed as income, so people in the top income bracket pay 37 percent on those earnings. Long-term capital gains are taxed at 20 percent for the highest earners. For high earners, the Net Investment Income Tax takes another 3.8 percent of investment income above a certain threshold. State taxes will also factor in, with some state tax rates more than double on short-term capital gains over long-term gains.
There are ways that a good investment tax strategy can minimize your tax hit. These tax strategies (like adding tax-efficient investments to your portfolio or using tax-loss harvesting to offset losses) should be planned out for maximum effect. That’s why evaluating the tax implications before every sale/acquisition of investment assets is essential. An opportunity that looks like a windfall at first glance could be a net loss after considering the tax effects.
- Lean into strategic asset allocation.
Spreading out your investment capital across different asset classes is generally advisable for investors at all income levels. Owning a mix of stocks, bonds, and other assets should protect your portfolio from market volatility. The principle behind strategic asset allocation is pretty simple. When economic shifts cause some of your stocks to drop, you should also own other assets that are less vulnerable to those conditions. High earners may be able to make many diverse investments across different asset classes in addition to more “traditional” investments like stocks and bonds. Buying investment real estate, collectibles, commodities, venture capital, specialty investment vehicles, angel investments, or other asset classes are all potentially lucrative ways to build a more diversified portfolio and possibly reduce your overall risk.
- Protect your emergency fund.
An expensive personal crisis can strike any one of us at any time. Whether it’s a surprise hospital bill or a home repair, you need an emergency plan. Having an adequate emergency fund can help prevent a scenario in which you have to scramble to sell off investments to cover your bills. That could disrupt your investment strategy and create new tax implications you weren’t planning for.
The general rule of thumb is to hold at least six months’ expenses in your emergency fund. If you can save more, great. Keep it in a dedicated interest-bearing savings account or money market fund so the money earns interest and is immediately accessible when an emergency happens.
- Be cautious about taking significant investment risks with your retirement savings.
Saving for retirement is one area of financial planning where most investors tend to be cautious about taking risks, for good reason. The future is unpredictable. For example, you don’t know how many decades you’ll spend retired or what your expenses will look like. There’s peace of mind in knowing you’ll be financially prepared for whatever retirement brings. It helps to know that your retirement savings are largely insulated from stock market swings and other economic shifts. Your advisors can help with risk-conscious retirement savings strategies to maximize your wealth. High earners can do things like fund backdoor Roth IRAs, max out annual contributions to HSAs, invest in a mix of bonds, etc., to grow retirement savings while mitigating the risks.
HIGH-INCOME INVESTORS, DO YOU KNOW HOW TO PROTECT YOUR WEALTH FROM INVESTMENT RISKS?
Sachetta’s investment advisors help high-income individuals grow their wealth over time. We’ll help you evaluate investment opportunities to find the ones best aligned with your financial goals while mitigating the risks inherent in investing. Let’s talk about the best investment risk management strategies for you. Contact us today.
Before joining Sachetta, Stephen Ahern co-founded and served as President of Wealth Management Advisors, LLC. For over thirty-five years, Stephen has provided individual financial, investment, estate, and tax planning and small business consulting to a diverse base of clients. His clients have included key top-level executives, high-net-worth individuals, business owners, venture capitalists, and entrepreneurs. As an established personal financial planner, Stephen has delivered numerous presentations on financial, investment, retirement, and tax planning to corporations and professional groups. He has also written articles on investment, education, and estate planning.