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How Important is Managing Risk in a Portfolio?

How Important is Managing Risk in a Portfolio?

| April 16, 2019

“Risk tolerance is about a heck of a lot more now than just ‘does your investment not grossly violate your time horizon and your willingness to take risk”- Michael Kitces

This quote seems to highlight the common misconceptions that investors have when it comes to managing the risk of their investments.  If you think back to when you first opened an investment account or started contributing to your 401(k), you most likely filled out an investment risk questionnaire that categorized you as a conservative, moderate, or aggressive investor. This risk tolerance classification was meant to serve as a guide of sorts to see which investments were suitable.

The ongoing problem we see with new clients to our firm:

  • There is often a big difference between the risk that clients are willing to take and how their portfolios are invested.
  • There are big swings within cookie cutter risk tolerance classifications. Ie/ someone who is aggressive may be at the bottom end of that classification or at the very top with, say, 100% equities.
  • There isn’t an ongoing system to measure and account for the risk of their portfolio. What started as moderate portfolio may have drifted to a more aggressive portfolio as equites have outpaced fixed income.

Managing risk has taken a back seat in these up markets.   As Human Nature would dictate, people seem to be less concerned with risk as their statements keep posting positive returns. Big negative market swings can wipe out gains. Don’t let this happen to you. Take our risk assessment today to get your risk score.