- January 9, 2023
- Posted by: Donald Moulton
- Category: Financial Planning
Managing your assets and employing great portfolio management tactics as an investor is something everybody would like to feel in control of. Even if a Spokane wealth advisor is involved (and in most cases, one should be), it’s reassuring to know that everything happening in your portfolio is, in one way or another, understood by you.
However, risk, in a financial sense, is a concept largely misunderstood.
Risk management doesn’t always get the necessary explanation it deserves. Despite risk being talked about openly between most Spokane wealth advisors and their clients, people generally choose portfolios that are “medium” risk, assuming that investments of that nature hit the sweet spot between “too risky” and “not risky enough.”
Besides the fact that basing your financial investments on assumptions isn’t the brightest idea, going with whatever feels right regarding risk is just plain irresponsible.
Judging risk involves more than just a gradient scale. A client’s age, number of assets, and risk aversion will influence what investments they’re willing to make. Risk is a complicated aspect of investing, and both the investor and investing firm need to understand every part of this principle.
Because of this, it’s crucial that you get familiar with risk and portfolio management to accurately assess whether or not your assets are safe.
Without a firm grasp on what the risk-to-reward ratio actually is, you could end up watching your investments plummet in a bear market.
On the other hand, if you’ve found that you’re one of the few more willing to take risks, this could lead you to find equities with a larger return proportionate to the actual risk itself.
Regardless of where you land, understanding the fundamentals of risk management is where every investor should start before deciding how to manage their portfolio.
Risk – How Does This Affect My Portfolio Management?
Risk, as we talked about earlier, is an aspect of investing that’s misunderstood by many investors.
In the most basic terms, risk can be best described as the potential for an investment’s gains to differ from the expected return. With risk, there is the possibility that some or all of an asset can be lost.
It’s a little scary put so plainly, but this information isn’t that unknown. Most investors are aware of risk in some way or another, and many will knowingly admit that there’s a chance their investment can be lost.
However, few consciously make decisions based on this factor, which can affect one’s portfolio management and asset allocation. On top of that, some Spokane wealth advisors will use this lack of knowledge to sell riskier investments to their clients. We don’t condone that type of conduct.
Knowing Your Spokane Wealth Advisor and How They Manage Risk
It’s unfortunate, but it does happen: some firms will push medium to high-risk portfolios for their clients. On paper, it can seem intriguing, and a lot of the investing jargon can fly over your head, but in reality, it’s a (for lack of a better term) risky move.
In general, if your investments ever have the potential of dropping in value by 20-30%, you’re in the danger zone. This is high-risk investing; for some, it can be the kind of investing you’re comfortable allocating your assets towards. However, for many, that potential loss can loom over them like a storm about to strike.
Those are two wildly different approaches to risk, bringing us to one of the most crucial parts of portfolio management—your attitude to risk.
Too Close For Comfort – Understanding Your Attitude to Risk
Learning your level of comfort with risk all comes down to your personality and how much you feel comfortable with potentially losing. Risk also involves potential gain, so for some, a higher-risk portfolio may be the right option.
High-risk portfolios tend to be almost entirely equity. Of course, discretionary income can be invested on top of that, but it can be nerve-wracking for many to see that extra income vanish if the market isn’t good. So, if you’ve got your eyes on a high-risk portfolio and the firm you’re working with advises it, be aware it isn’t necessarily for the faint of heart.
If you’re simply looking to invest your money and manage your assets in an intelligent way that will set you up nicely for retirement, you’ll most likely fall in the medium-low risk camp.
This is where most people are at realistically, no matter how daring they’d like to think themselves. A portfolio of 50% or fewer equities can perform more consistently long term and may avoid some of the turbulence seen in the high-risk category.
Knowing your ability to take risks will help you build a solid foundation to determine your portfolio management and investments down the line. It’s key to have an open conversation with your broker about the risks involved in your portfolio and if you’d want to potentially invest elsewhere.
At Moulton Wealth Management, we work closely with our clients to help them meet their financial goals. By understanding each individual’s risk aversion, we can help build a better ground for portfolio management and asset allocation.
If you’d like to work with a Spokane wealth advisor to get your portfolio under control and make smarter decisions about your investments, contact our office at 509-922-3110.