Adjust portfolio to avoid risk

Q: Should I bail on the market now?

A: Investors don’t mind risk until it goes against them. Knowing how much risk you can take, before the inevitable correction happens, is the key to long-term investing success.

The market’s recent big oneday swings downward have reminded investors stocks don’t always go up. The secret to surviving volatility is being prepared before it happens.

Over the past 20 years, the Standard & Poor’s 500 has generated an average annual return of 8.3%, Index Fund Advisors says. Getting that return has been filled with heartache and pain.

In any given year, there’s a 48% chance investors could be down as much as 22.4%. Investors endured a financial crisis, a housing bubble and a tech-stock implosion. Investors that rode through it have enjoyed a nearly 400% return.

If you’re not prepared to suffer the risk to get the S&P 500’s returns, you need to make adjustments to your portfolio now. Adding foreign stocks, valuepriced stocks and real-estate investment trusts can help a bit. But you need to dial back risk. Adding less risky assets such as bonds to your portfolio, before a stock correction, makes more sense then bailing out once volatility heats up.