By Frank Legan
The last year and a half has been packed with volatility—a global pandemic will do that! During times like these (and even in more “normal” years), 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 the irony is that 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’s the solution? 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?
If only it were as simple as telling your advisor you’re comfortable with “moderate” risk. The reality is that everyone has their own risk tolerance level, based on their age, life circumstances, personality, and time horizon. The key is pinpointing 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 Cedar Brook Group, we gather information, look at the facts, and build a portfolio that’s right for you. We work to align your investments and resources with your goals and values using The Humanity Factor™ as our guide. We design your financial plan with a downside first mentality and construct a portfolio you can hold onto when the road gets rough.
Our goal is to help you discover your risk limits before you’re overcome with fear and tempted to panic. We’d love to meet with you, talk through your goals, and work toward your dreams while staying within your personal risk level. Reach out to us by calling 440-683-9213 or emailing flegan@cedarbrookfinancial.com to schedule a complimentary appointment today.
About Frank
Frank Legan is Partner, Financial Advisor, and member of the Investment Committee at Cedar Brook Group, one of the largest independent wealth management firms in Northeast Ohio. Frank spends his days designing and implementing personalized financial planning strategies for corporate executives, closely held business owners, artists, families, and retirees. He specializes in lifetime income strategies, investment advice, and estate planning services. He also works with businesses to develop strategic and succession planning strategies. Frank has a Bachelor of Arts degree in Political Science from the University of Dayton, as well as a Master of Public Administration degree focused on municipal management from Cleveland State University. Prior to joining Cedar Brook Group, Frank was a financial advisor in the private client group at Merrill Lynch and with NatCity/PNC Investments. Frank is active in his community, serving on various councils, boards, and committees. When he’s not working, you can find Frank spending time with his wife, Laura, their daughter, Reese, and their beloved collie, Charlie. Frank and his family are volunteers at St. Francis of Assisi church in Gates Mills. Frank serves as Chairman of the Board of Directors for Catholic Charities Diocese of Cleveland. To learn more about Frank, connect with him on LinkedIn.
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(1) https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/loss-aversion/
