How Much Risk Is Too Much in Your Portfolio?
With the news full of economic woes these days, from interest rate hikes to sliding stock market indices, it can feel like our world is spinning out of control. In stressful economic times, it can be tempting to panic, especially when it comes to our finances. We are, after all, naturally averse to loss, and the pain of losing is more powerful than the potential to achieve gains. (1)
Here’s the caveat: when we make emotional decisions, we sometimes act irrationally in an attempt to avoid loss, causing us to 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.
You know you need to invest to grow your money into a nest egg that will sustain you in the future, but what can you do to prevent taking on too much risk in the process?
What Does Risk Tolerance Really Mean?
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.
How Can I Be Comfortable With Risk?
Wouldn’t it be nice if you could just tell your advisor you’re comfortable taking on “moderate” risk? The truth is that everyone, based on their age, life circumstances, personality, and time horizon, has their own unique risk tolerance level. 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 comes in and can make a world of difference. At Rosemeyer Management Group, we are dedicated to providing retirement plan investment management and strategic planning. Simply put, we strive to be our clients’ trusted advisor. As a financial advisory firm, our focus is to provide unbiased opinions for the purpose of long-term investment results, increased employee satisfaction, and reduced employer liability—all while keeping plan costs transparent. Schedule an introductory appointment online or by calling us at 608-348-2274. For any questions, feel free to reach out to me at firstname.lastname@example.org.
Carter Klaas is an investment advisor representative at Rosemeyer Management Group, an SEC Registered Investment Advisor based in Platteville, WI. Carter focuses on the people behind the dollars and cents, forging long-lasting relationships with his clients. Using clear, measurable financial goals, Carter works to bring financial confidence to those he calls clients through education, intentional planning, and a strong relationship built on mutual trust. By planning comprehensively with investment strategies, risk management strategies, retirement planning, tax planning, and estate planning, Carter makes sure all the pieces of a person’s financial “puzzle” fit and work together for their goals. He is dedicated to personalized planning because he realizes that the wide-ranging experiences and emotions revolving around money demand a custom-fit plan. Carter has a bachelor’s degree in personal finance and financial planning from the University of Wisconsin-Madison.
When he’s not at work, Carter enjoys spending time with his wife, Natalie, and their goldendoodle puppy, Willow. You’ll find them taking walks, drinking wine, watching the sun set, and being near the lake. To learn more about Carter, connect with him on LinkedIn.