Is Your Portfolio Risky Enough?

“Do you have any clients my age who own stocks?”

I've gotten this question a few times - mostly from retirees who are worried about being too aggressive in their portfolio.

There’s this idea out there that AGE is the most important factor in determining how aggressive your portfolio should be.

It’s not.

And we have rules of thumb to blame: "100-your age is how much you should have in stocks." PLEASE! (you can check out me railing against rules of thumb here).

So what is most important?

Two things:

1. Risk Capacity, and

2. Risk Tolerance

   
   

At first glance, they might seem like the same thing, but there's a key difference - the difference between the MATHEMATICAL answer and the EMOTIONAL answer.

RISK CAPACITY is mathematical. Knowing your risk capacity is how we can determine which types of risks are right for your portfolio.

Did you catch that?

We're not talking about HOW MUCH risk is right for your portfolio, we're talking about WHICH TYPES of risks are right for your portfolio.

"Investing involves risk" is a common statement made by advisors trying to cross their "t"s and dot their "i"s for compliance purposes, but the way we talk about risk gives people the wrong idea.

It makes it seem like ONE thing that's either HIGH or LOW.

In reality, it's an amalgamation of concepts (yes, using the word "amalgamation" is me trying to sound smart).

My next blog post will be about all the different types of risk, but if I go into that here, I won't be done with this post until next week.

RISK TOLERANCE, on the other hand is the emotional piece.

If you've ever filled out a questionnaire asking you about losses in your portfolio, this was an attempt to gauge your risk tolerance.

Are you someone who's going to call my crying if your accounts are down 20%?

Or call me every time we go to the voting booths?

For the record, I'm ALWAYS happy to take those phone calls. But that's what risk tolerance tells us.

It kind of gives us an idea of the volatility you can stomach. But it doesn't tell us the best way to invest your accounts - only financial planning can do that.

Conclusion

When we talk about risk in financial planning, we're often balancing risk capacity with risk tolerance.

Fun fact, I've seen risk tolerance of the people I work with increase with financial planning and education. They come to terms with the fact that they NEED the type of risk they had been fearing.

So if you've been working with an advisor that bases your investment allocation on age, and maybe a stale questionnaire, it might be time to make a change.

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As always, keep in mind that you don't have to go it alone. I’m Austin Preece, a financial planner in Eau Claire, Wisconsin, and I work virtually with people across the US. Check out my website to see what it's like to work with me and reach out if you have any questions.

If you found this post helpful, help spread the word! Share with friends and family that you think may benefit as well. But remember, this is solely for educational purposes - it's not advice.