Editors' pick: Originally published Nov. 18.
"This can't be happening."
That has become the catchphrase of 2016. From Donald Trump becoming President-elect to Brexit to the Syrian crisis to Zika, 2016 has seen more than its fair share of global turmoil.
Many of these can be considered black swan events -- events that investors don't expect and that deviate from what is expected. Most are random and difficult to predict, making it extremely that important portfolios are protected against the unexpected.
"If an investor spreads their assets around in less correlated assets and have enough exposure to assets that are low in risk -- i.e. shorter duration bonds, cash, or other alternative investments -- it can help," said Rob Lutts, CIO of Cabot Wealth Management. "A healthy spread among those assets reduces risk substantially."
Turmoil can impact investors in different ways, from loss of capital or impacting the potential upside in a trade. It's important to remember that diversification is not a dirty word on Wall Street, Lutts said. It helps provide exposure to different assets and allows you not to be too heavily weighted toward one sector or one asset class, like stocks or bonds.
With so many unknowns in the investing world, it's important to manage risk, limiting downside, while protecting upside. These tips can help.
1. Market/asset class risk
Sure, a lot of investors think stocks in different sectors are correlated, meaning they trade up or down together, but it's important to remember different asset classes trade together as well.