How Much Risk Is Too Much In Your Portfolio?

How Much Risk Is Too Much In Your Portfolio?

| May 20, 2021

From a global pandemic and a contentious election season to unprecedented market headlines and international unrest, it’s no surprise we have seen increased market volatility over the last year. And when it feels like our world is spinning out of control, it’s tempting to panic, especially when it comes to our finances. 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. 

What’s the solution? We know we need to invest to grow our money into a nest egg that will sustain us in the future, but how can you ensure you don’t take on too much risk in the process? 

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 dramatic election seasons. 

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? 

Unfortunately, it’s not as simple as telling your advisor you feel comfortable with “moderate” risk. Everyone has their own risk tolerance level, based on their age, life circumstances, and time horizon. The key is using a quantitative approach to 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. 

At T.A. Holland & Co., we use Riskalyze, an online tool based on Nobel Prize-winning research that gives you your personal risk number. Then, using your personal risk number as a foundation, we gather info, look at the facts, and build a portfolio that is right for you. It’s a way to give consistency and direction to your financial plan. Knowing your risk numbers helps us guide you toward a portfolio you can hold fast to when the road gets rough or when permanent loss stares you in the face. Give it a spin right now!

Our goal is to help you discover your risk limits before you’re overcome with fear and tempted to panic. We’d love to chat with you, talk through your goals, and work toward your dreams while working within your personal risk level. Reach out to us at info@taholland.com or 617-523-5656 to schedule a complimentary appointment so we can get to know each other.

About T.A. Holland & Co.

T.A. Holland & Co. was founded in Boston, Massachusetts, in 1920 and serves individuals and businesses throughout the country with their financial needs. We provide cutting-edge financial services with a broad array of solutions to help our clients grow and preserve their wealth. We have seen good and bad economic times. Throughout it all, T.A. Holland & Co. has thrived by always making the customer our number-one priority. We get to know you and understand your needs so we can provide you with the proper guidance and strategies. Our senior vice president, John Hellmuth, has been at the helm of T.A. Holland’s financial services since 1990, but he doesn’t do this job alone. He is joined by his two children, Lindsay Hellmuth and Thomas Hellmuth. As CERTIFIED FINANCIAL PLANNER™ practitioners, our financial services team has the knowledge and experience to help you solve your most pressing financial challenges. To learn more about how we can help you, visit our website and reach out to us to schedule a complimentary get-acquainted meeting.

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(1) https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/loss-aversion/