Time to reassess investment risk

For investors, this summer put risk back on the radar screen. Stock markets witnessed some of the biggest one-day swings of the decade, and the Dow Jones Industrial Average was hit with a roughly 10 percent downward correction.

For all the bumps, the Dow today isn't far from the record high it reached back in July, but uncertainty lingers.

The concerns: Tighter credit conditions and a housing slump appear to be slowing the economy, and that could potentially spell trouble for corporate earnings.

At the very least, this isn't a quiet bull market anymore and some investors are wondering whether they should apply any new strategies to manage risk. "I've been fielding more calls" on the subject, says Jason Mirsky, director of wealth management at RiskMetrics Group, a New York firm that specializes in analyzing financial threats.

Some of the best steps people can take will resonate with anyone who has read the handouts from their 401(k) plan or brokerage firm: Spread your risk by diversifying, and rebalance your portfolio if it gets out of line with your desired mix of stocks, bonds, and other holdings.

But financial experts also point to other, less familiar moves. They include investing in yourself, buying insurance products, and taking advantage of opportunities overseas.

The issue of risk came to the forefront this summer as banks and other institutions grappled with a plunge in the value of investments tied to subprime mortgage loans. The collapse of a few mortgage lenders rippled outward. Financial pros began repricing investments with a more sober assessment of the potential for trouble as well as for gains. "You've seen what happens when you look for too much return" and forget about risk, even in supposedly safer fixed-income investments like mortgage-backed securities, Mr. Mirsky says.

The answer isn't necessarily to sell all your stocks – which often offer the greatest potential for large investment gains over the long-term.

But the subject of risk is relevant now for reasons that are more far-reaching than the gyrations on Wall Street.

With the aging of the baby boom generation, more Americans are nearing the end of their careers. This comes as longer life spans are increasing the length of retirement. This "longevity risk" means people may need more money than ever for retirement living and the possibility of long-term nursing care.

"If you were going to prefund all your healthcare costs ... a single individual at 65 would need about a quarter of a million dollars," says Olivia Mitchell, an expert on retirement finances at the University of Pennsylvania's Wharton School in Philadelphia.

Invest in yourself

To meet those and other costs in retirement, the best investment workers can make probably isn't in stocks, bonds, or their home – it's in themselves. To increase financial security, Ms. Mitchell says, "work until you're 70.... The longer you can continue working, even on a part-time job, the later you can defer having to draw down your assets."

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