By Paul Bullock

In today’s economic landscape filled with troubling news, such as rising interest rates and a volatile stock market, it’s understandable to feel like our world is spinning out of control. During times of financial stress, it’s tempting to panic, especially when it comes to our personal finances. As humans, we naturally fear losses more than we anticipate gains, which can lead to irrational decision-making.

Here’s the catch: if we let emotions guide our choices, we often act impulsively in an attempt to avoid losses, which can result in even greater losses. Just ask any investor who sold their stocks when the market dipped, only to miss out on the subsequent recovery and repurchase stocks when prices were already high again.

You recognize the importance of investing to grow your wealth and reach a comfortable future, but how can you avoid taking on excessive risk in the process? Read our following thoughts to understand risk and strike the right balance in your portfolio.

What Does Risk Tolerance Really Mean? 

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 sleep at night 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 economic recessions.

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.

How Do I Know the Right Amount of Risk? 

Wouldn’t it be great if you could just tell your advisor that you’re okay with taking a moderate amount of risk? The truth is, everyone has their own comfort level when it comes to taking risks with their money, based on factors like their age, personal situation, and how much time they have. But how do you figure out how much risk you’re comfortable with, how much risk you need to take to meet your goals, and how much risk you currently have in your investments?

This is where a knowledgeable financial advisor can step in and help. At Wellington Investment Advisors, we specialize in managing retirement investments and creating strategic plans. Simply put, we want to be the advisor you can trust. As a financial advisory firm, our main goal is to provide objective advice that helps you experience long-term investment success, while also being transparent about the costs involved. Schedule a no-obligation introductory meeting or reach out to me at paul@wellingtoninvestmentadvisors.com or by phone at (812) 333-0874.

About Paul

Paul Bullock is CEO of Wellington Investment Advisors, an independent, boutique fiduciary firm serving pre-retirees and university faculty across Indiana. With over 34 years of financial experience, Paul is committed to building long-term relationships through thoughtful, personalized investment advice and guidance. He focuses on a disciplined tactical asset allocation approach to money management through a strong understanding of economic and market conditions and strives to build trust with clients by providing sound guidance. Paul understands the hard work his clients have put in to arrive at where they are today and wants to see them succeed in their goals for the future. Paul graduated from the University of Texas with an MBA, as well as a bachelor’s degree in finance, and has been dedicated to assisting clients with their financial needs ever since. When he is not working, Paul enjoys time with his family and is also an avid equestrian polo player who helps raise money for over 18 different charities through his playing. To learn more about Paul, connect with him on LinkedIn.