My wife and I took our family to visit some friends “up north” this year. While we were there, we decided to do some skiing, and this was a good lesson in risk tolerance. Attempting to be good parents, we enrolled our kids into ski school and allowed some professionals to teach them… rather than a couple of Floridians. After the lessons, the instructor who worked with our oldest — who is 7 — pulled us to the side and gave us a quick debriefing.
“She is good to go down the bunny slope by herself and is comfortable on skis, which is good. But she has absolutely no fear of speed. She will take two turns and head straight down the hill and I couldn’t catch her. I don’t know where you live, but you may want to enroll her in downhill racing.” Needless to say — we are not signing up for downhill racing (mainly due to the commute.)
So, being cautious parents, we decided to take her up the hill and see this for ourselves. The instructor was not completely accurate, she took half a turn and then headed downhill going as fast as she could, weaving in and out of the ski lift support poles (the large telephone pole sized ones.) You can hear my beloved wife, in the video she was taking, yell in a very disparaging way: “Holland Henderson!” As though I could kick in my super-secret skiing power and catch my daughter on a full sprint, well past 30 yards ahead of me. All said and done, she did make it down the hill safe, sound, and justified in her newfound skiing ability. But what a lesson in risk tolerance it was.
How to approach the topic of risk
A huge component of financial planning is discussing risk tolerance in portfolios, something I prefer to do in person with my clients. With some individuals, as we are discussing this topic, scenes of risk play through their head on a loop. The emotion they feel in those moments is very much like what my wife was feeling watching her first-born barrel down that hill with reckless abandon. It’s visceral and it feels very real, especially for many who came out of the Great Recession with some scars of loss. The important question is: how can we approach that risk of loss with wisdom and confidence?
Understand what it means to invest
Investing is all about putting money at a certain level of risk to seek a greater return in the long run. Pullbacks and bear markets will happen. The key is to position your portfolio with the appropriate amount of risk for your timeline and comfort level; in an effort to maximize the chances you will hit your mark while also managing inevitable risk.
Think of risk tolerance in terms of your investment timeline
In general, shorter timelines call for lower risk. Conversely, for retirement plans, it could be a 30-year timeline or longer, meaning that higher overall risk may be appropriate depending on your personal tolerance. I recommend that you meet with me or any financial advisor to discuss your personal timeline, your goals, and how you can maximize the chances you will hit those goals. One tip: when you’re at the threshold, remember that it’s not necessarily time to go full stop on risk. Your money needs to last all the way through.
When and how you withdraw money: it matters
If you’re taking your funds out during down markets — with no concerns or thought process taking place — you could be accelerating your losses unnecessarily and is a risk on its own. Meaning that when equity (or stock) markets are down and you continue to pull funds from those assets, you may be solidifying those losses. Reacting to down markets this way may have you selling more shares than you anticipate. One possible alternative is to pull funds from assets less affected by market downturn. (This is why proper portfolio diversification is very important.)
Maintain perspective during the highs and lows of investing
Not every 500-point drop in the market signals the imminent collapse of modern society. When the market does have a drop, pull up your account the next business day and see how it was truly affected. Now, I’m not saying to hover over your accounts in an unhealthy manner — rather, that you stay informed and are looking at the bigger picture. If you are properly diversified, you should be taking part in both ups and downs, but not to the full extremes (drops or even lack of growth.)
Discuss your risk tolerance with a financial advisor
All in all, I really recommend that you speak with a financial advisor for professional advice on how to tailor your investment plan for your individual goals and risk tolerance. If you need help on your portfolio, I’m here for you. (For skiing expertise, not so much.)
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.