Retired Investors - How Do You Manage Risk?

by: Bob Wells

Even as a Dividend Growth Investor, it's hard sometimes not to think about risk, what with the fiscal cliff, continued unrest in the Middle East, financial uncertainty in Europe, the "Dividend Bubble." The list just seems to go on forever.

Controlling risk is likely priority one to retired investors like me seeking to maintain a safe, growing stream of monthly retirement income and capital preservation. In the spirit of the 12 Days of Christmas, I'd like to present the 12 ways I seek to reduce risk.

First, I choose stocks from the lists of Dividend Champions, Challengers and Contenders (CCCs), updated monthly by Contributor David Fish and available free of charge through this link: Each of these of these holdings both maintained and increased their dividend during the bear market of 2008 and the years that followed. If you were a retired Dividend Growth Investor in 2008 invested in CCC stocks, you were more likely to have stayed fully invested since your monthly income may have even increased during this turbulent period.

Second, I have elected to hold a minimum of 50 equal weighted positions to eliminate concern about loss of monthly income due to dividend cuts or elimination. A retired Dividend Growth Investor with 50 equal weighted positions in a balanced portfolio again was far less likely to have panicked in 2008.

Third, I reduce risk by having a core of stocks that lost less than half what the market lost in 2002 and 2008, and collectively outperformed the market each year between 2002- 2012. A link to this list is provided here.

Fourth, I reduce risk by having a portfolio that yields over 5%. Unlike retirees who subscribe to the 4% withdrawal rule in retirement, I'm not required to sell my holdings. I face none of the risk to capital associated with selling during down months, plus none of the associated costs of selling equities on a monthly basis. Instead, I just have my broker deposit the equivalent of a monthly check in my checking account the first of the month.

Fifth, I reduce risk each time I select a stock with a low payout ratio. Low payout helps ensure that any company I buy can afford to continue providing and growing dividends for its shareholders.

Sixth, I reduce risk by having a portfolio averaging a beta of .7, meaning it's 30% less volatile than the index.

Seventh, I reduce risk by having a portfolio of stocks that collectively average a 5-year Dividend Growth Rate (DGR) of over 10%, helping to ensure I keep pace with inflation.

Eighth, I reduce risk by selecting new holdings with upward trending dividend growth rates. At the present time, approximately 50% of my holdings have such upward trending rates.

Ninth, I reduce risk by buying stocks that are fairly or better yet undervalued. I use Fast Graphs and Morningstar to help establish value.

Tenth, I reduce risk by elimination of all management fees and expenses. I have a brokerage account that provides 30 free trades per month.

Eleventh, I reduce risk by having clear guidelines for the buying and selling of my holdings as part of a portfolio business plan. I believe that having such a plan means I am more likely to make less emotional investing decisions. Here's a link to my plan.

Finally, I reduce risk by conducting a comprehensive quarterly review of my portfolio based on clear investment goals set out in my formal portfolio business plan.

Now it's your turn. I'd like to hear from you. How do you reduce risk?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.