Risk

    After having served on the Board of Directors for a local credit union for the past few years, I have learned much more about risk and how to manage it. Financial Institutions are in the business of risk, so they must be able to effectively identify and manage many different types of risk. Loaning money to strangers is about the riskiest business I can think of, so lenders must have a whole department devoted to mitigating risk. The recent increase in volatility in the stock market has also increased the risk of holding stocks. This is true even if you hold mutual funds or annuities that have a stock component. Since I am no longer in the accumulation stage of my life, I am more sensitive to the market risk than I used to be when I was working. I can no longer afford to have such a long term perspective as a younger person would. One type of risk that I am currently attending to is concentration risk. Even though I happen to like the prospects of the financial sector, I have come to realize that I am too heavily concentrated in bank stocks and other financial companies. I have taken steps to reduce my exposure to this sector by placing some sell orders (limit) just this morning. Just because this market is in correction mode doesn't mean that there aren't days of strength that I can sell into. In order to be tax efficient, I have also placed some sell orders of some positions that just aren't working out. Remember, any capital gains taken in a given year can be offset with capital losses to minimize your tax burden. Any excess capital loss over $3.000.00 must be carried-over to following tax years, where it can be used to offset gains and income. I try to match any gains with losses to achieve a near zero reportable gain where possible. The proceeds of these sales will be split between safe fixed income investments like CD's and some stocks on my wish list. I still like some technology stocks and also some defense related issues. There are currently some very attractive valuations on leading chip stocks due to the market sell-off. In conclusion, check your portfolio for excess concentration in any sector, diversification is the key for mitigating risk.