By Craig Childress, CFP®
Are the panic-inducing headlines about inflation and stock market volatility causing you stress? We get it. In stressful economic times, it can be tempting to panic—especially when it comes to our finances. After all, we are naturally averse to loss, and the pain of losing is more powerful than the potential to achieve gains.
But it’s crucial to keep in mind that when making emotional decisions, we sometimes act irrationally in an attempt to avoid loss…causing us to 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.
It’s necessary to invest in order to grow your wealth into a nest egg that will sustain you in the future. But how do you prevent taking on too much risk in the process?
What Is Risk Tolerance Exactly?
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. When your investment doesn’t grow above the pace of inflation and taxes, it loses its spending power—and that is a sure loss.
How Can I Be Comfortable With Risk?
“Can’t I just tell my advisor I’m comfortable taking on ‘moderate’ risk?” Well, the truth is that everyone (based on age, life circumstances, personality, and time horizon) has their own unique risk tolerance level. So how do you pinpoint how much risk you’re comfortable taking? How much risk do you need to take to reach your goals? And how much risk do you currently have in your portfolio?
To get answers to these questions, consider enlisting the help of an experienced financial planner. At Oswego Wealth Advisors, we are dedicated to providing retirement plan investment management and strategic planning. By setting clear goals together and remaining committed to those goals along the way, we help you build a strong legacy and help secure your future. In fact, it’s our mission to help you remove financial uncertainty so you can spend more time enjoying what matters most to you. To get started, schedule an introductory phone call or reach out to us at 503-342-2249 or email@example.com.
Craig Childress is Wealth Manager and a CERTIFIED FINANCIAL PLANNER™ professional at Oswego Wealth Advisors, an independent firm in Lake Oswego, Oregon, dedicated to helping their clients remove financial uncertainty so they can focus on what matters most. With over 35 years of experience, Craig employs a personal approach to help people find solutions to their financial needs and concerns, set goals, clarify their values, and design a plan that aligns their money with their values. He does everything with purpose and intention, and cares deeply about his clients and their families, desiring to equip and empower them to work toward financial freedom and a fulfilling life. As a Fiduciary, Craig puts his clients first, always, and provides transparent guidance that makes a significant difference in their lives. When he is not serving his clients, you can find Craig involved at River West Church, serving the community here and abroad through the Lake Oswego Rotary Club, reading, gardening, or playing his guitar. He loves spending time with his family, especially his wife, Terri, and their grown children. To learn more about Craig, connect with him on LinkedIn.