By Antonio Porretta
The last year and a half has been marked by volatility—a global pandemic will do that! During times like these (and even in more “typical†years), it’s tempting to panic, especially when it comes to our finances. After all, human beings are naturally resistant to loss, and the pain of losing is more powerful than the potential to achieve gains. (1)
But when we make emotional decisions and act irrationally in an attempt to avoid loss, ironically, 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 answer to this dilemma? You know you need to invest as you seek to grow your money into a nest egg that will sustain you in the future, but how do you avoid taking 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 remain confident 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 dramatic election seasons.
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 You Do About Risk?
If you tell your financial advisor you feel comfortable with a “moderate†amount of risk, they’ll likely smile back and then press you for more information. Unfortunately, it’s not that simple. Because everyone is unique based on age, life circumstances, time horizon (to name just a few factors), that means everyone has a risk tolerance level specific to them. The key is pinpointing how much risk you are comfortable taking, how much risk you need to take to pursue your goals, and how much risk you currently have in your portfolio.
That’s where an experienced financial professional comes in and can make a difference. In a time of heightened emotions and dramatic headlines, knowing you have someone in your corner watching out for your money and making sure you are on track brings confidence. Our mission at Blackbridge Financial is to help you discover your risk limits before you’re overcome with fear and tempted to panic, and develop a holistic plan designed to connect you with your future.
To start talking through your goals and working toward your dreams within your personal risk level, reach out to me at antonio.porretta@lpl.com or call 704.960.9646. We look forward to hearing from you!
About Antonio
Antonio Porretta is an independent wealth manager at Blackbridge Financial with over 20 years of experience. He specializes in helping people create, distribute, and preserve their wealth. Antonio received an executive MBA from Saunders College of Business at Rochester Institute of Technology in 2007 and also holds the Accredited Asset Management Specialist (AAMS®) designation. Originally from Rochester, NY, Antonio has been a resident of Harrisburg, NC, since 2007. Outside of work, he enjoys playing soccer and tennis, coaching, and spending time with his wife, Laura, and their children, Cristiano, Victoria, and Matteo. To learn more about Antonio and how he can make a difference in your financial life, visit www.blackbridgefinancial.com.
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Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through Independent Advisor Alliance, a registered investment advisor. Independent Advisor Alliance and Blackbridge Financial are separate entities from LPL Financial.
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(1) https://www.investopedia.com/terms/l/loss-psychology.asp