Every investor is different. Some people feel comfortable betting on a hot new company that just went public, and some people feel better sticking to more traditional investments. Whatever your preference, it’s important that your portfolio reflects your risk tolerance. Understanding how comfortable you are with taking risks will help you understand whether or not theres too much risk in your portfolio.
You know you need to invest to grow your money into a nest egg that will sustain you in the future, but what can you do to prevent taking on too much risk in the process?
What Is Risk Tolerance?
In the financial world, risk tolerance is defined as a measure of ones financial ability to withstand losses. While you cant 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.
Heres the thing we need to remember when were tempted to get out of the market ASAP: some risks are avoidable, and 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 companys stock in your 401(k) plan. Or you may have an overabundance of overlapping stocks within mutual funds that you do not realize. 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 and volatile, and we cant predict everything. As much as we wish they werent, 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?
You might be wondering, “Can I just tell my advisor I’m comfortable taking on ‘moderate’ risk?” If only it were that simple! 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 we come in. At Infiniti Wealth Management, we help clients make smart choices about their money and finances through guidance and expertise. We help you achieve your goals based on what is important to you, regardless of what happens in the markets, the economy, or politics. If you’d like to discuss the risk in your portfolio, call our office at 845-278-8638 or send us a message to set up a complimentary consultation.
Michael Durante is a founder, Certified Financial Planner™ (CFP®), and Certified Divorce Financial Analyst™ (CDFA®) at Infiniti Wealth Management, an independent, fee-only financial advisory firm. With over 25 years of experience, Mike specializes in serving women who are going through a life transition, whether that’s a divorce or the death of a spouse, as well as pre-retiree and retiree couples. He is passionate about helping his clients develop a personalized financial plan based on their values and goals so they enter retirement with confidence and peace of mind. Mike has both a bachelor’s degree in business administration and an MBA from Pace University. When he’s not working, Mike loves spending time outdoors hiking, biking, walking, golfing, campfires, the beach and doing yard work, as well as spending time with family and friends. Mike also enjoys to read, travel, and check out local restaurants and events. To learn more about Mike, connect with him on LinkedIn.
January 30, 2023 - Michael Durante, CFP®, CDFA®