That risk score can tell you how to allocate your investment among stocks, bonds, and cash. It can also help you determine how to deploy capital across different types of stocks. Once you’re armed with this information, you’ll know whether or not you’re prepared for volatility. If you’re too exposed to risk, you can buy lower-risk assets. If your allocation is already optimal, you don’t need to change anything.
3. Re-allocate to low-volatility assets
At the end of a bull market, many investors are too heavily exposed to risky growth assets. Many people got carried away with greed and optimism and piled into stocks. Even if you didn’t switch your strategy as the market rose, the strong performance of stocks probably skewed your allocation from its previous balance. This could be a good time to review your portfolio weighting and rebalance it.
Bonds and cash are the most popular asset classes for reducing volatility. These can fluctuate in value, but they typically don’t change as drastically as stocks. If the market crashes, your losses will be reduced by holding bonds or cash. Moreover, you’ll have more capital to buy stocks at a discount after the market drops.