How Much Risk Is Too Much in Your Portfolio?
Risk is an unavoidable part of life. We take a risk every time we step outside our home, get in a car, or fly a plane. While life can certainly be unpredictable, we do have some level of control in how much risk we choose to take when making certain decisions. When it comes to our finances, for example, we get to decide how much risk we want to take by how we manage our investments. As the market has seen increased volatility over the last couple of years due to a global pandemic, increasing inflation, and international and political unrest, it can be tempting to panic. After all, human beings are naturally averse to loss, and the pain of losing is more powerful than the potential to achieve gains.(*1)
But here’s the irony: when we make emotional decisions and act irrationally in an attempt to avoid loss, we can lose even more. Just ask any investor who has sold stock when the market dropped and missed the recovery, only buying back in when the markets were high again.
So how can you avoid too much risk while still investing in your nest egg that will sustain you in the future? Here we explain three types of risk and what you can do about them.
What Type of Risk Are We Talking About?
In the financial world, risk tolerance is defined as a measure of one’s financial ability to withstand losses. While you can’t completely eliminate risk in your portfolio, you can ensure that the amount of risk you take correlates with the level of potential reward for you to gain. It is more than possible to match your investments to your goals while still being able to sleep at night during market downturns.
Here’s the thing we need to remember when we’re tempted to get out of the market ASAP: some risks are avoidable, some are not. Avoidable risks are those that occur when your portfolio leans too heavily on stocks or bonds that have been unstable in the past or when your holdings are not diversified appropriately.
For example, you may be putting too much of your company’s stock in your 401(k) plan. Or you may have an overabundance of overlapping U.S. stock mutual funds instead of being more globally diversified. Avoidable risks often occur when we underestimate risk and believe we can tolerate more than we actually can.
On the other hand, unavoidable risks are those that occur because our world is ever-changing, volatile, and we can’t predict everything. As much as we wish they weren’t, unavoidable risks are simply out of our control. This type of risk includes unfortunate events like geopolitical issues, global pandemics, and economic recessions.
The third category of risk is often unseen, but it can impact your portfolio just as intensely as an obvious risk: the risk of being too conservative and not achieving your future goals as a result. By overestimating risk and trying to avoid loss at any cost, you could be unintentionally sacrificing your future dreams.
What Can I Do About Risk?
It would be a lot easier if you could simply tell your advisor that you’re comfortable taking on “moderate” risk. But there is no one-size-fits-all approach to investing. The truth is that everyone, based on their age, life circumstances, personality, and time horizon, has their own unique risk tolerance level. So, how do you pinpoint how much risk you are comfortable taking, how much risk you need to take to reach your goals, and how much risk you currently have in your portfolio?
That’s where an experienced financial advisor can make a world of difference. As an independent RIA firm, our goal is to help you discover your risk limits before you’re overcome with fear and tempted to panic. We gather information, look at the facts, and build a portfolio that’s right for you. Working to align your investments and resources with your goals and values, we design a financial plan you can hold on to when the road gets rough (and it surely will). Call us at 770-281-9390 or e-mail us today to see if we’re the right fit to help you on your financial journey.
About Cypress Wealth Services
Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high net worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services is uniquely qualified to serve a broad range of client needs, and their experience and expertise act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring the wealth and legacy a person has already built to their loved ones. With financial advisors in Palm Desert, CA, Tustin, CA, Athens, GA, and Anchorage, AK, the firm serves clients across the country in Wealth Management Services, Fiduciary Services, 401(k) Design and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit www.CypressWS.com or call 760.834.7250.