From a global pandemic to a contentious election season to unprecedented market headlines (GameStop, we’re looking at you), 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.
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 Is Risk?
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 absolutely ensure 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 which 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’s The Solution?
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. It’s important to run through various scenarios with different risk levels to get an idea of how much loss you are comfortable with. If you start to panic and cringe, then you know you have hit or passed your limit. Both positive and negative emotions frequently cause investors to make unwise decisions. If you’re excited about the upward swing of the market, you might throw caution to the wind and invest more money than you normally would. On the flip side, fear might drive you to react and sell if you start losing money.
By anticipating your limit for risk, you can simulate situations that cause those emotions so you are prepared when they happen in real time. It’s a safeguard that will help keep you focused on the long term and trust in your strategy.
What’s Next?
Determining your personal risk tolerance involves analyzing your financial situation and balancing it with what you hope to achieve. Sentinel Wealth Partners can help you with that. We have an online tool, based on Nobel Prize-winning research, where you can find out your personal Risk Number. All in less than 2 minutes. Give it a spin right now!
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. Our goal is to help you discover your risk limits before you’re overcome with fear and tempted to panic. I’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 today by calling our office at 703-832-0164, sending an email to [email protected], or using our online calendar to get started today!
About Brian
Brian Bloxom is an Independent Financial Advisor, Chartered Federal Employee Benefits Consultant (ChFEBCSM), and Chartered Retirement Planning Counselor (CRPC) with 25 years of experience in financial advising. He founded Sentinel Wealth Partners to serve retirees, individuals approaching retirement, and individuals managing complex retirement plans such as company plans or federal benefits plans. His expertise and dedication to helping his clients achieve their goals make him a trusted resource that will help you feel confident in your customized retirement plan. Brian’s mission is to be available to his clients—all the time. He’s here to solve your problems, relieve your anxiety, and give you optimism for retirement. Because ultimately, your retirement should be about well-deserved enjoyment, and not about stress or anxiety. When he’s not working, you can find Brian spending time with his wife, Jessica, and their two sons, Spencer and Preston. He enjoys coaching soccer, serving in his community, golfing, and relaxing at his vacation home at Lake Anna, VA. To learn more about Brian, connect with him on LinkedIn.