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How Much Risk Is Too Much in Your Portfolio? Thumbnail

How Much Risk Is Too Much in Your Portfolio?

By Daniel Baumgartner & Petra Peters

Sometimes it takes a stock market drop and economic changes to get investors thinking about how to better shield their assets. When market conditions shift quickly, you may not be prepared, both financially or emotionally, to tolerate the swift downturn in your portfolio.  

In unpredictable economic times, it can be tempting to panic out of fear, especially as it relates to our finances. After all, we as human beings are naturally averse to loss, and the pain of losing is more powerful than the potential to imagine our gains.

But the truth is, when we make decisions based out of fear, we sometimes react irrationally in order to avoid the pain of the loss, which inevitably causes us to lose even more. 

To arm yourself against market swings, you may want to consider reexamining your investment strategy through the lens of your current risk tolerance and projected time horizon. Below are some basics to keep in mind about playing defense, along with ideas for managing risk during turbulent times.

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 Can I Become Comfortable With Risk? 

Each person’s tolerance of risk is unique and different. Some risk takers will go all in, and other conservative types will want to hedge their bets with slow, incremental changes. Variables such as time horizon, age, lifestyle decisions, circumstances, and personality will factor into every equation. Do you know how much risk you are comfortable taking? Do you know how much you need to take in order to reach your goals? Or how much you actually have in your current portfolio?

Supporting our clients through these complex decisions is one of the primary reasons we became investment advisors. Having an experienced financial advisor can make a world of difference in knowing what level of risk is right for you. At Terra Nova Asset Management, we are dedicated to providing investment advice and strive to be our clients’ trusted financial professional. As an investment firm, our focus is to provide unbiased opinions for the purpose of long-term results—all while keeping plan costs transparent. 

Does it seem like we may be a good fit? Reach out to us directly at 212-355-1234 or ppeters@terranovausa.com for the New York office (Petra) or 855-248-6630 or baumgartner@terranovausa.com for the New Jersey office (Daniel). You may also contact us here to schedule a meeting and we’ll get in touch with you soon! 

About Daniel

Daniel Baumgartner is a founding partner of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Daniel has extensive experience in marketing, development of special U.S.-investment products, as well as customer acquisition and relationship management. His ultimate goal is to make a difference in his clients’ financial lives through honest investment advice. He strives to provide high-touch, personalized service and enjoys getting to know a client’s personality as it relates to their financial circumstances before crafting the right solutions. As money is a very personal subject, Daniel takes his responsibility as an advisor very seriously, forming long-term relationships with clients based on trust. 

Daniel received his degree in finance and international business from New York University. Outside of the office, he is a hobby landscape, street photographer, and has a great interest in U.S. and European history (16th-19th centuries), believing it helps him answer the question “Why is something the way it is?”

About Petra

Petra Peters is a founding partner and the Chief Executive Officer of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Petra has decades of experience in the banking industry, asset management, overseeing the administration of individual accounts, and designing and advising specialized funds tailored to the requirements of international private and institutional clients. With extensive knowledge of both Europe and the U.S., she’s able to provide advice and services beyond the typical investment advisor. Petra desires for her clients to live a financially care-free life so they can pursue their passions, and she values their trust and gratitude. Creating invaluable friendships formed over years of partnership, some clients even consider her part of their family.

Petra’s interests outside of work include classical music, history, travel, charities, motorcycling, and golf. She is also on the board of a German charity.