I get questions all the time from clients who want to understand risk tolerance. Questions like:
- “What are the different types of investment risk?”
- “How much risk is just right?”
- “How much risk is too much?”
While those are all good questions, the truth is that investment risk tolerance is unique to each individual; it’s not possible to answer these questions in general terms. As a wealth-management professional, the real issue for me is helping you accumulate wealth while matching your risk tolerance with your individual financial goals.
Understanding Risk Tolerance
Risk tolerance refers to your ability to endure financial loss. It’s important to recognize that while you can’t completely eliminate risk from your portfolio, you can manage it by balancing potential risks with your desired returns. The key is aligning your investment risks with your financial goals.
There are two main categories of risk to consider:
- Unavoidable risks
- Avoidable risks
Let’s dive deeper into both.
Unavoidable Risks
Unavoidable risks are external factors that you simply cannot predict or control, such as:
- Geopolitical events
- Global pandemics
- Economic recessions
These risks affect the broader markets and can have far-reaching impacts, regardless of how well you manage your portfolio.
Avoidable Risks
On the other hand, avoidable risks arise when a portfolio is not properly diversified or when there is an excessive concentration in a particular asset. These risks can be mitigated with careful planning. For example:
- Imagine your 401(k) is heavily invested in your company’s stock.
- Or, you may have multiple U.S. stock mutual funds with significant overlap instead of diversifying across different countries and sectors.
Avoidable risk often happens when we underestimate the potential for financial pitfalls or assume we can handle more risk than we actually should. However, being too conservative can also be risky. By overestimating risk and avoiding loss at any cost, you could jeopardize your financial independence in the long run.
Finding Comfort With Risk
Many clients say they are comfortable with taking on “moderate” risk. But the truth is, financial risk tolerance is deeply personal. Everyone’s situation is unique, and risk tolerance should reflect your personal financial circumstances, goals, and timeline.
To find the right balance, it’s crucial to work with a trusted financial advisor. A good advisor will help you determine:
- How much risk you’re comfortable taking.
- The appropriate level of risk for your financial goals.
- The current level of risk in your portfolio.
Work With Us
At Paragon Wealth Management, we know that there’s no “one-size-fits-all” solution to risk tolerance. Our team can help you find the ideal balance between risk and reward, so you can pursue financial independence with confidence.
If you’d like to schedule a meeting, give us a call at (215) 348-3176 or send an email to charlie@paragon-wealth.com. We look forward to helping you reach your financial goals.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Any securities mentioned here are for informational purposes only and are not recommendations to buy or sell any security.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Paragon Wealth Management and Great Valley Advisor Group are separate entities from LPL Financial.