“No risk, no reward!” Most people are familiar with this expression. But familiarity can be far from fully understanding all the implications. I wanted to offer a few thoughts on the topic of risk tolerance right now because we are seeing economic and market conditions which are challenging even the most experienced investors to consider their relationship with risk and returns. I hope this can be useful as you evaluate your own strategy and consider the level of risk appropriate for you and your financial goals.
In my experience, relatively few people truly appreciate the tradeoffs that exist between investment risk and return. When the market is chugging along consistently, rising month after month, year after year, it might be easy for some to believe they have a high tolerance for risk. But the very definition of risk implies that it won’t always be smooth sailing.
In fact, those who start investing during periods of steady growth may discover that they actually only have a high tolerance for positive returns. Then, when the stock market drops and the news starts filling up with unsettling headlines, that appetite for risk can fade rather quickly.
Sometimes it takes a few tries – or a few market cycles – to figure out what your risk tolerance really is.
This is not an encouragement to jump ship from current markets. The main thing to remember is that the market’s performance last year (or even last week) shouldn’t be the determining factor in how we invest for the future. We were reminded of this truth in 2020 when, after falling 34% in less than two months, the S&P 500 went on to experience incredible growth, closing out the calendar year with a +16% return (source: YCharts).
I am also not saying that investors should never make changes to their portfolio. There are many reasons why it would be smart to change an allocation or swap out an investment. One example: An investor who is within a few years of retirement may benefit from taking some chips off the table and experiencing less drastic swings in their portfolio value — especially if they are going to rely on regular distributions to cover living expenses. Or one’s life circumstances could take a sudden swerve.
Understanding your true risk tolerance can be a useful tool in setting your expectations about investment outcomes, but quantifying it can be tricky. And, if you’re anything like me, you might have trouble filling out a risk profile because every question might seem to have a “right” and “wrong” answer. In other words, you might know what you ought to do in a given situation, but it can be difficult to gauge the emotional impact of those decisions during stressful, unforeseen circumstances. Alternatively, you may second guess your answers and start overthinking the available options.
Fortunately, at Halbert Hargrove our recommendation for an appropriate portfolio strategy is based on learning as much as we can about you – not on some quick survey that might tap into your perceived risk tolerance. We believe taking the LifePhase investing approach is essential to gain a deeper understanding – to learn about the things that keep you up at night, what inspires you to dream about the future, your hobbies and travel plans, your goals to help support your children.
All of these factors play a role in how we think about making investments on your behalf. We appreciate opportunities to speak with you about what matters to you. And that most certainly includes exploring how to help you determine, and keep calibrating, your own tolerance – or intolerance – for risk.
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.
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