3 strategies to help reduce investment risk

History shows that when people invest and stay invested, they’re more likely to earn positive returns in the long run. When markets start to fluctuate, it may be tempting to make financial decisions in reaction to changes to your portfolio. But people who base their financial decisions on emotion often end up buying when the market is high and selling when prices are low. These investors ultimately have a harder time reaching their long-term financial goals.

How can you avoid making these common investing mistakes? Consider these investment strategies, which can help you reduce the risks associated with investing and potentially earn more consistent returns over time.

Strategy 1: Asset allocation

Appropriate asset allocation refers to the way you weight the investments in your portfolio to try to meet a specific objective — and it may be the single most important factor in the success of your portfolio. 

For instance, if your goal is to pursue growth, and you’re willing to take on market risk to reach that goal, you may decide to place as much as 80% of your assets in stocks and as little as 20% in bonds. Before you decide how you’ll divide the asset classes in your portfolio, make sure you know your investment timeframe and the possible risks and rewards of each asset class.

Risks and rewards of major asset classes

Stocks

  • Can carry a high level of market risk over the short term due to fluctuating markets
  • Historically earn higher long-term returns than other asset classes
  • Generally outpace inflation better than most other investments over the long term

Bonds

  • Generally have less severe short-term price fluctuations than stocks and therefore offer lower market risk
  • Can preserve principal and tend to provide lower long-term returns and have higher inflation risks over time
  • Bond prices are likely to fall when interest rates rise (if you sell a bond before it matures, you may get a higher or lower price than you paid, depending on the direction of interest rates)

Money market instruments

  • Among the most stable of all asset classes in terms of returns, money market instruments carry low market risk (managers of these securities try to keep the per-share price at $1 and distribute returns as dividends)
  • Generally don’t have the potential to outpace inflation by a large margin
  • Not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency (there’s no guarantee that any fund will maintain a stable $1 share price)

Different asset classes offer varying levels of potential return and market risk. For example, unlike stocks and corporate bonds, government T-bills offer guaranteed principal and interest — although money market funds that invest in them do not. As with any security, past performance doesn’t necessarily indicate future results. And asset allocation does not guarantee a profit.

Strategy 2: Portfolio diversification

Asset allocation and portfolio diversification go hand in hand. 

Portfolio diversification is the process of selecting a variety of investments within each asset class to help reduce investment risk. Diversification across asset classes may also help lessen the impact of major market swings on your portfolio.

How portfolio diversification works

If you were to invest in the stock of just one company, you’d be taking on greater risk by relying solely on the performance of that company to grow your investment. This is known as “single-security risk” — the risk that your investment will fluctuate widely in value with the price of one holding. 

But if you instead buy stocks in 15 or 20 companies in several different industries, you can reduce the potential for a substantial loss. If the return on one investment is falling, the return on another may be rising, which may help offset the poor performer.

Keep in mind, this doesn’t eliminate risk, and there is no guarantee against investment loss.

Strategy 3: Dollar-cost averaging

Dollar-cost averaging is a disciplined investment strategy that can help smooth out the effects of market fluctuations in your portfolio.

With this approach, you apply a specific dollar amount toward the purchase of stocks, bonds and/or mutual funds on a regular basis. As a result, you purchase more shares when prices are low and fewer shares when prices are high. Over time, the average cost of your shares will usually be lower than the average price of those shares. And because this strategy is systematic, it can help you avoid making emotional investment decisions.

How dollar-cost averaging might work in rising and declining markets

In the illustration below, the cost of the investment ranges between $10 and $25 from January through April. A fixed monthly investment of $100 buys as many as 10 shares when the price is lowest but only four shares when the price is highest. In this example, dollar-cost averaging results in a lower average share price during the period, while the market average price — for someone who bought an equal number of shares each month — is higher.

Dollar-cost averaging at $100 per month

Rising market
 
 
Month
When the price is
You buy
January
$10
10.00 shares
February
$15
6.67 shares
March
$20
5.00 shares
April
$25
4.00 shares

Declining market
 
 
Month
When the price is
You buy
January
$25
4.00 shares
February
$20
5.00 shares
March
$10
10.00 shares
April
$5
20.00 shares

Your Ameriprise financial advisor can help you feel more confident about your financial future, so discuss these strategies with your advisor to see if they may be right for you.

Disclosures

Asset allocation, diversification and dollar-cost averaging do not assure a profit or protect against loss.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
There are risks associated with fixed income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities.
Stock investments have an element of risk. High-quality stocks may be appropriate for some investments strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with stocks before investing, as they can lose value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.

3 strategies to help reduce investment risk

History shows that when people invest and stay invested, they’re more likely to earn positive returns in the long run. When markets start to fluctuate, it may be tempting to make financial decisions in reaction to changes to your portfolio. But people who base their financial decisions on emotion often end up buying when the market is high and selling when prices are low. These investors ultimately have a harder time reaching their long-term financial goals.

How can you avoid making these common investing mistakes? Consider these investment strategies, which can help you reduce the risks associated with investing and potentially earn more consistent returns over time.

Strategy 1: Asset allocation

Appropriate asset allocation refers to the way you weight the investments in your portfolio to try to meet a specific objective — and it may be the single most important factor in the success of your portfolio. 

For instance, if your goal is to pursue growth, and you’re willing to take on market risk to reach that goal, you may decide to place as much as 80% of your assets in stocks and as little as 20% in bonds. Before you decide how you’ll divide the asset classes in your portfolio, make sure you know your investment timeframe and the possible risks and rewards of each asset class.

Risks and rewards of major asset classes

Stocks

  • Can carry a high level of market risk over the short term due to fluctuating markets
  • Historically earn higher long-term returns than other asset classes
  • Generally outpace inflation better than most other investments over the long term

Bonds

  • Generally have less severe short-term price fluctuations than stocks and therefore offer lower market risk
  • Can preserve principal and tend to provide lower long-term returns and have higher inflation risks over time
  • Bond prices are likely to fall when interest rates rise (if you sell a bond before it matures, you may get a higher or lower price than you paid, depending on the direction of interest rates)

Money market instruments

  • Among the most stable of all asset classes in terms of returns, money market instruments carry low market risk (managers of these securities try to keep the per-share price at $1 and distribute returns as dividends)
  • Generally don’t have the potential to outpace inflation by a large margin
  • Not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency (there’s no guarantee that any fund will maintain a stable $1 share price)

Different asset classes offer varying levels of potential return and market risk. For example, unlike stocks and corporate bonds, government T-bills offer guaranteed principal and interest — although money market funds that invest in them do not. As with any security, past performance doesn’t necessarily indicate future results. And asset allocation does not guarantee a profit.

Strategy 2: Portfolio diversification

Asset allocation and portfolio diversification go hand in hand. 

Portfolio diversification is the process of selecting a variety of investments within each asset class to help reduce investment risk. Diversification across asset classes may also help lessen the impact of major market swings on your portfolio.

How portfolio diversification works

If you were to invest in the stock of just one company, you’d be taking on greater risk by relying solely on the performance of that company to grow your investment. This is known as “single-security risk” — the risk that your investment will fluctuate widely in value with the price of one holding. 

But if you instead buy stocks in 15 or 20 companies in several different industries, you can reduce the potential for a substantial loss. If the return on one investment is falling, the return on another may be rising, which may help offset the poor performer.

Keep in mind, this doesn’t eliminate risk, and there is no guarantee against investment loss.

Strategy 3: Dollar-cost averaging

Dollar-cost averaging is a disciplined investment strategy that can help smooth out the effects of market fluctuations in your portfolio.

With this approach, you apply a specific dollar amount toward the purchase of stocks, bonds and/or mutual funds on a regular basis. As a result, you purchase more shares when prices are low and fewer shares when prices are high. Over time, the average cost of your shares will usually be lower than the average price of those shares. And because this strategy is systematic, it can help you avoid making emotional investment decisions.

How dollar-cost averaging might work in rising and declining markets

In the illustration below, the cost of the investment ranges between $10 and $25 from January through April. A fixed monthly investment of $100 buys as many as 10 shares when the price is lowest but only four shares when the price is highest. In this example, dollar-cost averaging results in a lower average share price during the period, while the market average price — for someone who bought an equal number of shares each month — is higher.

Dollar-cost averaging at $100 per month

Rising market
 
 
Month
When the price is
You buy
January
$10
10.00 shares
February
$15
6.67 shares
March
$20
5.00 shares
April
$25
4.00 shares

Declining market
 
 
Month
When the price is
You buy
January
$25
4.00 shares
February
$20
5.00 shares
March
$10
10.00 shares
April
$5
20.00 shares

Your Ameriprise financial advisor can help you feel more confident about your financial future, so discuss these strategies with your advisor to see if they may be right for you.

Disclosures

Asset allocation, diversification and dollar-cost averaging do not assure a profit or protect against loss.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
There are risks associated with fixed income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities.
Stock investments have an element of risk. High-quality stocks may be appropriate for some investments strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with stocks before investing, as they can lose value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.

5 types of investment fraud to watch out for

Seniors lose $36.4 billion each year to financial abuse — $16.8 billion of which comes from deceptive investing tactics designed specifically to take advantage of older Americans.¹ Also known as “financial exploitation,” this type of investment fraud is defined by the use of misleading language to obtain account information and permission to access the victim’s money.

According to the National Council on Aging, investment fraud targeting seniors has become so widespread that it’s now considered “the crime of the 21st century.”² While financial scams often go unreported, they can be devastating to older Americans who have less time to make up for losses. 

Retirees are particularly vulnerable to investing scams because they often have large amounts of money saved, and “get rich quick” schemes can be appealing to those on a fixed income.

The first step to protecting yourself — or a parent — from investing scams is knowing which red flags to look for.

Here are the five most common types of fraud:

Pyramid scheme

Also known as a Ponzi scheme, this involves using money from new investors to provide a return — often much higher than typical market gains — to existing investors rather than using legitimate investment returns. Ponzi schemes fall apart when the money owed to the initial investors becomes greater than the amount that can be raised from new investors. Pyramid scheme operators may reach out via phone, email or word of mouth.

What to watch for: If investment returns seem too good to be true, they probably are. If in doubt, request documentation such as a fund prospectus or the most recent annual report. These may help provide more context for investors — or raise suspicions if they aren’t readily available for review. If you’re not sure, talk to your advisor before making any moves. 

Pump and dump scheme

This involves a group of people buying a stock then recommending it to thousands of investors. The result? A rapid spike in stock price followed by an equally fast downfall. The perpetrators who bought the stock sell off their shares at a huge profit when the price peaks. Pump and dump schemes often circulate on internet investing blogs, or you may receive a promotional email.

What to watch for: Smaller, lesser-known companies are more likely to be used in this scheme because it’s easier to manipulate a stock when there’s little or no information available about the company.

Targeting seniors has become so widespread that it’s now considered “the crime of the 21st century.”– National Council on Aging

Off-shore investing fraud

The internet has eroded barriers that once made it difficult for overseas fraudsters to prey on U.S. residents. Conflicting time zones, the cost of international telephone calls and differing currencies are no longer an obstacle — and international wire transfers can occur instantaneously. Phone calls are a common method of communication for the perpetrators, enabling real-time wire transfers to be made before victims have time to do any research.

What to watch for: Investment opportunities originating in a country that is outside the jurisdiction of local U.S. law enforcement agencies. Ask for legal documentation stating where the funds are registered.

Prime bank scams

Used in an official capacity, this term describes the top 50 or so banks in the world. Real prime banks often trade high-quality, low-risk investments such as bonds. Fraudsters often claim investors’ funds will be used to purchase “prime bank” investments that they claim will generate significant gains. Because these investments usually don’t exist, investors are unlikely to see their money again.

What to watch for: The term “prime bank” is often used by perpetrators looking to lend legitimacy to their scheme, whereas real prime banks that are easily located through a Google search are able to rely on name recognition alone.

Bulletin boards and newsletter money scams

Investment boards have gone the way of online blogs, where nearly anyone can offer an opinion no matter how qualified they are — or aren’t. While there may be some valid posts by financial experts, perpetrators often use boards to plant fake “insider” tips meant to drive stock prices up or down. Know that company employees can also use blogs to spread promotional information, and it’s not illegal for companies to use employees to write online newsletters to promote their stock.

What to watch for: Federal laws require that disclosures with legally-required details about their offerings are located at the bottom of documents on company-generated information. Fraudulent newsletters are unlikely to provide such language.

Talk to us first to protect yourself from fraud

Not sure an investment you’re interested in is the real thing? It’s wise not to make any sudden moves. Your advisor can help determine whether it’s legitimate or explore alternative investments with you.

Disclosures

¹True Link Financial, “The True Link Report on Elder Financial Abuse 2015”: http://documents.truelinkfinancial.com/True-Link-Report-On-Elder-Financial-Abuse-012815.pdf
²National Council on Aging, “Top 10 Financial Scams Targeting Seniors”: https://www.ncoa.org/economic-security/money-management/scams-security/top-10-scams-targeting-seniors/
Ameriprise Financial Services, Inc. Member FINRA and SIPC.

SECURE Act: How could it impact your retirement planning?

The Setting Every Community Up for Retirement Enhancement — the SECURE Act — was signed into law Dec. 20, 2019. Many provisions took effect Jan. 1, 2020. The SECURE Act retirement planning changes that are most relevant in the near term include: 

  • A later age for required minimum distributions (RMDs): age 72 from 70 ½ previously. 
  • A change to the IRA stretch strategy for non-spouse beneficiaries who inherit retirement accounts. 
  • Elimination of the 70 ½ age limit for workers who contribute to a traditional IRA. 

Required minimum distributions 

The SECURE Act increases the RMD age to 72 from 70 ½ and applies to anyone who turns 70 ½ in 2020 or later. 

If you don’t need income from your retirement plan or IRA accounts, the SECURE Act enables you to defer taxes from those accounts. If you want to work longer, the later RMD age provides more time for retirement-income planning.

Additional details: 

  • You turned 70 ½ in 2019: The SECURE Act does not change your RMD timing. You must take your first RMD by April 1, 2020. 
  • You will turn 70 ½ in 2020 or later: Under the SECURE Act, you must take your first RMD by April 1 after the year you reach age 72.  

First half 2020 birthday example: Turn 70 in spring 2020 and 70½ in December 2020

New rule – SECURE Act 
Former rule 
Under the SECURE Act, this person must take their first RMD by April 1, 2023 — the April 1 following their 72nd birthday in 2022. They receive two extra years because of the bill.
Under the former rules, this person would have had to take their first RMD by April 1, 2021 — the April 1 of the year following their 70 ½ birthday in 2020.

Second half 2020 birthday example: Turn 70 in fall 2020 and 70 ½ in spring 2021

New rule – SECURE Act 
Former rule 
Under the SECURE Act, this person must take their first RMD by April 1, 2023 — the April 1 following their 72nd birthday in 2022. They receive one extra year because of the bill.
Under the former rules, this person would have had to take their first RMD by April 1, 2022 — the April 1 of the year following their 70 ½ birthday.

IRA stretch strategy in estate plans  

Prior to the Secure Act, beneficiaries who inherited retirement accounts (such as a traditional or Roth IRA) could take the RMDs over their lifetime. The SECURE Act changes that financial strategy for most non-spouse beneficiaries who inherit their retirement account on or after Jan. 1, 2020. As a result: 

  • Most non-spouse beneficiaries must take the account proceeds (and pay the corresponding taxes) within 10 years of inheriting the account. This can be done with any number of distributions.  
  • Spouse beneficiaries, non-spouse beneficiaries who are no more than 10 years younger than the IRA owner and non-spouse beneficiaries who are disabled or chronically ill will continue to be able to stretch their IRAs over their lifetime.
  • If a minor child inherits the IRA, the 10-year period begins when the beneficiary reaches the age of majority (the age at which a minor child legally becomes an adult, generally between 18 – 21 years old).
  • A beneficiary who inherits an individual retirement account before the end of 2019 can still draw down the account over their lifetime. However, if a beneficiary inherits an IRA before the end of 2019 and dies Jan. 1, 2020, or later, that beneficiary’s beneficiary will be subject to the 10-year rule. For example:  
    • Allen’s son, Joe, inherits Allen’s IRA on Nov. 12, 2015. Joe takes RMDs over Joe’s life expectancy. 
    • On Feb. 12, 2020, Joe dies. Joe’s spouse, Fran, inherits the remainder of the IRA Joe inherited from Allen. Fran must take out the remainder of the IRA within 10 years. 

Traditional IRAs

The SECURE Act eliminates the 70 ½ age limit for contributions to a traditional IRA.

  • There is no change for Roth IRAs, which do not have an age limit. 
  • As always, you must have earned income to contribute to a traditional or Roth IRA. The SECURE Act does not change that requirement.  
  • Special rules apply to ensure individuals who make contributions after age 70 ½ cannot also receive a qualified charitable distribution (QCD) exclusion for those amounts. 

We are here to help you 

How could the changes impact you? An Ameriprise advisor can help you understand what the SECURE Act means for you and provide personalized advice to adjust your retirement income plans.

Disclosures

Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.

SECURE Act: How could it impact your retirement planning?

The Setting Every Community Up for Retirement Enhancement — the SECURE Act — was signed into law Dec. 20, 2019. Many provisions took effect Jan. 1, 2020. The SECURE Act retirement planning changes that are most relevant in the near term include: 

  • A later age for required minimum distributions (RMDs): age 72 from 70 ½ previously. 
  • A change to the IRA stretch strategy for non-spouse beneficiaries who inherit retirement accounts. 
  • Elimination of the 70 ½ age limit for workers who contribute to a traditional IRA. 

Required minimum distributions 

The SECURE Act increases the RMD age to 72 from 70 ½ and applies to anyone who turns 70 ½ in 2020 or later. 

If you don’t need income from your retirement plan or IRA accounts, the SECURE Act enables you to defer taxes from those accounts. If you want to work longer, the later RMD age provides more time for retirement-income planning.

Additional details: 

  • You turned 70 ½ in 2019: The SECURE Act does not change your RMD timing. You must take your first RMD by April 1, 2020. 
  • You will turn 70 ½ in 2020 or later: Under the SECURE Act, you must take your first RMD by April 1 after the year you reach age 72.  

First half 2020 birthday example: Turn 70 in spring 2020 and 70½ in December 2020

New rule – SECURE Act 
Former rule 
Under the SECURE Act, this person must take their first RMD by April 1, 2023 — the April 1 following their 72nd birthday in 2022. They receive two extra years because of the bill.
Under the former rules, this person would have had to take their first RMD by April 1, 2021 — the April 1 of the year following their 70 ½ birthday in 2020.

Second half 2020 birthday example: Turn 70 in fall 2020 and 70 ½ in spring 2021

New rule – SECURE Act 
Former rule 
Under the SECURE Act, this person must take their first RMD by April 1, 2023 — the April 1 following their 72nd birthday in 2022. They receive one extra year because of the bill.
Under the former rules, this person would have had to take their first RMD by April 1, 2022 — the April 1 of the year following their 70 ½ birthday.

IRA stretch strategy in estate plans  

Prior to the Secure Act, beneficiaries who inherited retirement accounts (such as a traditional or Roth IRA) could take the RMDs over their lifetime. The SECURE Act changes that financial strategy for most non-spouse beneficiaries who inherit their retirement account on or after Jan. 1, 2020. As a result: 

  • Most non-spouse beneficiaries must take the account proceeds (and pay the corresponding taxes) within 10 years of inheriting the account. This can be done with any number of distributions.  
  • Spouse beneficiaries, non-spouse beneficiaries who are no more than 10 years younger than the IRA owner and non-spouse beneficiaries who are disabled or chronically ill will continue to be able to stretch their IRAs over their lifetime.
  • If a minor child inherits the IRA, the 10-year period begins when the beneficiary reaches the age of majority (the age at which a minor child legally becomes an adult, generally between 18 – 21 years old).
  • A beneficiary who inherits an individual retirement account before the end of 2019 can still draw down the account over their lifetime. However, if a beneficiary inherits an IRA before the end of 2019 and dies Jan. 1, 2020, or later, that beneficiary’s beneficiary will be subject to the 10-year rule. For example:  
    • Allen’s son, Joe, inherits Allen’s IRA on Nov. 12, 2015. Joe takes RMDs over Joe’s life expectancy. 
    • On Feb. 12, 2020, Joe dies. Joe’s spouse, Fran, inherits the remainder of the IRA Joe inherited from Allen. Fran must take out the remainder of the IRA within 10 years. 

Traditional IRAs

The SECURE Act eliminates the 70 ½ age limit for contributions to a traditional IRA.

  • There is no change for Roth IRAs, which do not have an age limit. 
  • As always, you must have earned income to contribute to a traditional or Roth IRA. The SECURE Act does not change that requirement.  
  • Special rules apply to ensure individuals who make contributions after age 70 ½ cannot also receive a qualified charitable distribution (QCD) exclusion for those amounts. 

We are here to help you 

How could the changes impact you? An Ameriprise advisor can help you understand what the SECURE Act means for you and provide personalized advice to adjust your retirement income plans.

Disclosures

Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.