Every time you turn on the news, you likely see a new headline about interest rate hikes, sliding stock markets, or changing world events. All this buzz can make even the most grounded investor nervous. But should everything going on change how much risk you’re taking with your portfolio?
When we make emotional decisions based on current events, 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. This is why risk tolerance is so important.
Let’s discuss more about risk tolerance, why it’s important, and how you can use risk tolerance to adjust your investments if needed.
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 and 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?
It would be so much simpler 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 can come in and make a world of difference. At our firm, we can help you identify your level of risk and how that is reflected in your portfolio. As a financial advisory firm, our focus is to provide impartial opinions for the purpose of long-term investment results, increased employee satisfaction, and reduced employer liability—all while keeping plan costs transparent. Reach out to us at email@example.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. 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. Through it all, T.A. Holland & Co. has thrived by always making the customer our #1 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 at (617) 523-5656 to schedule a complimentary get-acquainted meeting.