By Marjorie L. Rand, CPA, CFP®, RICP®
From a global pandemic to increasing inflation to political headlines to international unrest, it’s no surprise we have seen increased market volatility over the last couple years. 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.
So what can you do? You know you need to invest to grow your money into a nest egg that will sustain you 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 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.
What Can I Do About 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. As an independent advisor, my goal is to help you discover your risk limits before you’re overcome with fear and tempted to panic. I gather information, look at the facts, and build a portfolio that’s right for you. Working to align your investments and resources with your goals and values, I design a financial plan you can hold on to when the road gets rough (and it surely will). Schedule a 20-minute introductory call or reach out to me at 908-895-2406 or firstname.lastname@example.org to see if I’m the right fit to help you on your financial journey.
About MargeMarjorie Rand is founder and financial advisor at Rand Financial Planning, a comprehensive, fee-only, fiduciary financial planning firm. Marge specializes in helping her clients plan for a secure retirement and navigate life’s many transitions through customized, tax-efficient retirement planning. She is passionate about empowering her clients to make the best financial decisions for their life and being by their side no matter what life throws at them. Marjorie spent many years as a CPA before founding Rand Financial Planning so she could be a go-to source for all her clients’ financial needs and help them avoid costly mistakes. She has a bachelor’s degree in accounting from Rutgers University and a Master of Science in Taxation from Fairleigh Dickinson University, along with the Retirement Income Certified Professional® (RICP®) and CERTIFIED FINANCIAL PLANNER™ certifications. When she’s not working, Marge enjoys boating, horseback riding, traveling, and hiking with her husband and her dog, Rangeley. To learn more about Marjorie, connect with her on LinkedIn.