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How Much Risk Is In Your Portfolio?

How Much Risk Is In Your Portfolio?

| February 16, 2021
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Pandemics, social upheaval, market volatility, oh my! If you read news headlines, it may feel like our world is spinning out of control, which can lead to panic and a whole lot of emotion. For many of us, one of our first thoughts in uncertain times goes to our finances. We worry about our investments, our income, and maintaining our lifestyle, and we’re likely tempted to go into protective mode. 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 do we do this in a way that doesn’t strike fear into our hearts?

Enter Riskalyze.

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 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 Do 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 Match Point Financial, 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. Call us at 352-207-8014 or schedule a complimentary phone call using our online calendar to get started. 

About Chris

Chris Reed is a financial advisor and the founder of Match Point Financial. Since 2002, he has been helping people make informed choices with their money and pursue their financial goals and objectives. He started his career with MetLife and has continued seeking to provide his clients with the best possible service through A.G. Edwards, UBS, and finally through partnering with Cetera Advisors LLC and forming his own independent firm in 2010. Learn more about Chris by connecting with him on LinkedIn or register for his recent webinar Are Your Old 401(k)s Collecting Dust and Losing You Money? here.

Financial Advisor: Securities and advisory services offered through Cetera Advisors LLC, member FINRA/ SIPC, a broker/dealer and a Registered Investment Advisor. Cetera is under separate ownership from any other named entity.  

Cetera Advisors LLC and Riskalyze are separate entities. Accuracy of information provided by Riskalyze is not guaranteed by Cetera Advisors LLC. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. 

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

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