MoneyDo: Align your portfolio’s risk.

 

Risk. Many associate the word risk with other words like danger or caution. Talking about risk could be an opportunity to give you peace of mind.

In this week’s MoneyDo, we suggest you Align your portfolio’s risk with your risk capacity.

The conversation about risk starts with your goals and what actions are necessary to achieve them.

  • Generally, there is a relationship between risk and return.
  • Financial professionals typically don’t suggest taking on excessive risk with the hopes of attaining extreme returns.
  • Instead, the amount of risk being shouldered in a portfolio should be based on the time horizon and an individual’s tolerance for risk.

Goals On The Horizon

Your ability to manage risk should be tempered by the amount of time you have until you reach your goal – a point in the future we call the time horizon. Your risk capacity is measured partly by your investment time horizon.

Considering your time horizon can help to move your planning from fantasy to goals that are actionable and hopefully, attainable.

  • If your time horizon is shorter, then stability should be valued.
  • Conversely, if your time horizon is longer, then more risk can generally be tolerated.
  • Our team will work with you to build risk-appropriate solutions to fulfill your goals and our risk measuring software can communicate portfolio expectations going forward.

Your Comfort Zone

An important part of assessing risk is understanding how you emotionally tolerate volatility and natural market fluctuations. Most everyone can handle the upside of market cycles we’ve seen recently, but how would you react in a market correction? How much of a pullback in the market would cause you to panic and, would panic cause you to pull out of your investments?

  • Determining the boundaries of your comfort zone will increase your self-awareness, and help you better understand why your portfolio is invested like it is.
  • Understanding that comfort zone could help you avoid letting short term reactions to the markets drive decision-making that could thwart the long-term success of your financial plan.
  • At Annex Wealth Management, we help you determine your risk tolerance and work with you to build a plan focused on your short and long term financial goals.

Allocation

Your ability to tolerate risk and your time horizon partly dictate how your portfolio is allocated. Typically, an investor will allocate his or her portfolio across four main asset classes: equities, fixed income, alternative investments and cash equivalents. Each has a different characteristic with regard to risk.

  • Owning a highly concentrated investment or even overweighting – investing an unbalanced amount – within a particular industry can pose a great risk.
  • Investors sometime seek to diversify – meaning to spread investments across several asset classes that will generally perform in different fashions under similar market conditions. This relationship is known as correlation.
  • At Annex Wealth Management, we use advanced technology to communicate the level of risk associated with a portfolio in an easy to understand format. Our goal is to help a client understand the relationship between actual risk of the portfolio and the client’s tolerance.
  • Awareness starts a path to building a properly diversified portfolio based the time horizon of the investor and their tolerance for risk.

Ask yourself: Does your portfolio’s risk level align with your risk tolerance and your time horizon?  When combined these concepts define your overall capacity for risk.

If you need help, Annex Wealth Management can assist you in identifying and defining your personal risk profile. Our goal is to have your portfolio’s risk level align with your risk capacity.

Just spending the time understanding yourself and your portfolio often brings a stronger sense of awareness of your plan. And better awareness can lead to higher confidence and potentially, better peace of mind.