Risk Management for the Long-Term Investor

The Calm Before the Fear

Permit me to introduce an investor whom we’ll call Michael. He is 41* years old, and a disciplined DIY investor who left his full-service investment advisor to build a globally diversified, 100% equity portfolio in early 2023. The portfolio consists of:

 

• 45% U.S. equity ETF
• 30% Canadian equity ETF
• 18% developed international ETF
• 7% emerging markets ETF

 

Michael built this portfolio carefully, modelling it after the asset-allocation ETFs that are common in Canada right now. However, instead of buying a single asset-allocation ETF, he decided to build it himself by selecting individual ETFs. That way, he could save the added management costs. Since leaving his investment advisor, Michael’s approach is to drive costs down as low as possible. He was frustrated that his advisor didn’t save his portfolio from the losses he experienced after the inflation-driven 2022 bear market, so he decided to go it on his own, telling himself he was “buying low” and at low cost.

 

Over the next three years, the markets recovered, especially U.S. stocks. His portfolio soared, nearly doubling in three years. Michael subscribed to the common investing wisdom, “Let your winners run,” so he decided not to rebalance at the beginning of 2024 or 2025.

 

However, a few days of steep declines in the U.S. market have suddenly erased weeks of gains. The headlines are screaming about “the bubble bursting.” His U.S. exposure is now 55% of his portfolio… and dropping! The equilibrium is broken; Michael feels uneasy for the first time in three years.

 

When “Winners” Become Worries

Michael has realized that what once felt like commonsense prudence, holding onto his winners, now feels like risk. Suddenly, the social media finfluencers he’d happily ignored for the last three years gain new prominence as they flood his feed:

 

• “Everything’s overvalued!”
• “The crash is coming!”
• “Smart money is moving into life insurance or gold!”

 

These voices sow anxiety, but very conveniently for them, offer “safe alternatives” that happen to pay them commissions.

 

Talk of a bubble also makes Michael question whether the long-term investing approach he believed in still works. Can he both stay invested and avoid a crash?

 

The Forgotten Role of Rebalancing

The clue to Michael’s path forward comes from revisiting his original investment plan, his target asset allocation. While Michael had chosen an aggressive path, 100% equities, with an estimated 20 years or more to go until he retires, he felt that the risk was warranted. What he hadn’t considered, though, was rebalancing back to his target asset allocation among his various equity positions.

 

The stock trader’s mantra of letting your winners run is not necessarily the key point to remember for long-term investors. Rebalancing might not be optimal in some scenarios, but our ability to predict market outcomes is limited at best. The point of rebalancing, however, is not to attempt to predict market outcomes but to discipline the investor’s own behaviour. By periodically rebalancing, you are selling off a portion of the higher-performing asset and buying the assets that are performing more poorly.

 

In Michael’s case, this involves trimming back on his U.S. equity holdings and reallocating to the categories that were now underweighted (Canada, developed international, and emerging markets). By returning to the original balance, going forward, Michael limits the risk of overexposure to the U.S.

 

This process embodies the adage of risk managers everywhere: “You cannot eliminate risk, but you can manage it with discipline.” True risk management isn’t finding the next “safe product” being peddled by a person of dubious credentials, but sticking with a structure that anticipates volatility.

 

The Freedom of Process over Prediction

The “good news” of sound investing is that you don’t have to forecast to succeed; you just have to stay consistent.

 

In our story, Michael rebalances his portfolio, even though it feels counterintuitive. He reviews his risk capacity and acts in accordance with his investment policy. Here are some additional considerations:

 

• Near-retirees or retirees might hold one or two years of spending needs in cash or short-term instruments to weather downturns.
• For someone who finds the short-term volatility of an all-equity portfolio too much to stomach, an appropriate amount in a high-quality fixed-income bond ETF can smooth those returns by adding diversification and protecting against the temptation to bail on investing altogether.
• As Michael is doing, regardless of the proportion one invests in stocks (equities), buying funds that hold assets from around the world, also known as global diversification, guards against the potential to be overwhelmed by domestic (i.e., Canadian) economic shocks.
• For those still accumulating assets for retirement, as Michael is, downturns are, in effect, sales, opportunities to buy more at lower prices. Fretting about temporary losses on paper when you probably have a lifetime ahead of you misses the potential benefit you are experiencing at that moment.
• Ultimately, rebalancing turns volatility into a feature, not a flaw, of investing.

 

The Ongoing Practice of Patient Investing

Looking down the road some months later, the markets continue to have their ups and downs, but Michael feels calmer. The funds in his investment portfolio continue to drift naturally as the various categories respond to events, but now he pays attention to thresholds he has established to rebalance when one asset class or another gets out of balance.

 

As for the finfluencers, he’s simply tuned them out.

 

The lesson: Market cycles may come and go, and financial pundits will always be telling us that prices are either too cheap or too expensive. But if Michael and each of us invests according to our desired asset allocation, rebalancing periodically, and maintaining that disciplined process throughout our investing “careers,” our well-managed finances will lead to well-managed emotions and undoubtedly a healthier investment portfolio over the long run.

 

 

*40.6 is the median age of all Canadians as of July 1, 2025, per Statistics Canada. Table 17-10-0005-01  Population estimates on July 1, by age and gender.

 

This is the 303rd blog post for Russ Writes, first published on 2025-11-10.

 

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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.

 

Photo by Loic Leray on Unsplash