De-risking a portfolio is a process where you get rid of your risky equity investments and replace them with safer fixed income investments when a goal is nearing or when you feel you will need money in the short term.
The question of how long in advance should you prepare to de-risk your portfolio appeared a few days ago in the Suggest a Topic section, and I have done this once myself so I’m sharing what I did and my rationale behind it.
I have invested in stocks since I was 17 or 18 and all my money has always been (still is) invested in equities (not recommended to others) except for one stretch of about a year when I had to de-risk my portfolio.
That was one when I was getting married. I got married in the January of 2010, and like most people, that was a significant expense for me.
I remember the broad details from my plan at the time, and I downloaded my brokerage statement which has the date wise transactions to refresh my memory on what was going on at the time.
Stopped buying shares 9 months before the wedding
The last big buy transaction on my statement was in April 2009, which was about 9 months prior to my wedding. So, at that point I decided to not buy any more shares and save that money for the upcoming expense. Now remember, this was quite soon after the big bad crash of 2008, and anyone who witnessed that crash or the one before that knows that markets come down very violently very quickly, and there is just no way to get out of the market during such crashes. So, keeping that in mind, about 9 months prior to the wedding, I stopped investing in risky equity and saved that money.
That was the first step to de-risk my portfolio – to stop my equity investments and reduce my exposure that way. For most people, you won’t need to stop all your equity investments altogether because you will have other safer investments also, and not everything you have will be invested in risky stocks.
I would imagine that moderating your ongoing investments before a big upcoming expense about a year in advance is worth a thought for everyone though.
I would love to say that I started a RD or some other investment with this money, but that won’t be true, the money that didn’t go into stocks just stayed idle in a savings bank account. Everyone else should however think of using up this money more wisely and putting it into a safe instrument that can be liquidated easily.
Started selling 3 months in advance
Stopping equity investments only saves you that much money, and the bulk of the money was raised by selling stocks in two periods of time.
I sold the first big chunk in October which was about 2 – 3 months before the wedding, and the dual reason was that you need some money a few months in advance and that I wanted to lock in some gains that the great year of 2009 brought for most investors. I think leaving the selling to just 2 – 3 months before the wedding was cutting it close but I was able to do that simply because I was sitting on gains and it was quite clear to me that it would take something very dramatic to put me in a position where I come up short for money.
Interestingly, the second big sale was on the 21st January, which was just two days before the wedding on the 23rd, and even I feel quite incredulous that I waited that long to make the sale – again the only reason I could wait for so long was that the market was doing well and I didn’t feel pressed for cash.
I don’t think it is advisable to wait just 4 or 5 days before you actually need the money, and I think you should have all the money you will possibly need at least 2 – 3 months in advance safely in the bank.
My goal of derisking
As I think about my decisions at that point in time, my first goal was to not sell at a big loss. This was a big concern for me because I didn’t have any other investments to fall back upon if the market fell. I would have been forced to sell my shares at a loss to raise the cash.
Stopping my equity investments and locking the gains in my portfolio gave me the comfort to know that I won’t need to sell a lot at a loss if a 2008 like situation resurfaced.
The second goal was to maximize the return, which is always a goal for everyone, and although I wasn’t hurt by what I did – I think that was not the prudent thing to do and if a 2008 like situation would have emerged, I would have felt a bit of discomfort. I think getting money in hand two or three months before the actual expense is due is a wise thing to do and everyone should plan for that.
My approach was anchored on not selling at a loss and was suited to my financial situation at the time, this will be different for everyone but I do think a common sense approach of planning for a big expense, a year or so in advance is sufficient to keep you in a comfortable state provided it fits within your longer term goals and plans.
This post is from the Suggest a Topic page.