How Much Risk Is Too Much in Your Portfolio?

By Yusuf Osman, MBA

From a global pandemic to increasing inflation to unprecedented market headlines and geopolitical unrest, it’s no surprise we have seen increased market volatility over the last two years. And when it feels like our world is spinning out of control, it’s tempting to panic, especially over our finances. After all, human beings are naturally averse to loss, and the pain of losing is more powerful than the potential to achieve gains. (1)

But here’s the irony: when we make emotional decisions and act irrationally in an attempt to avoid loss, we can lose even more. Just ask any investor who has sold stock when the market dropped and missed the recovery, only buying back in when the markets were high again.

What’s the solution? We know we need to invest to grow our money into a nest egg that will sustain us in the future, but how can you ensure you don’t take on too much risk in the process?

What Type of Risk Are We Talking About?

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 have an overabundance of overlapping domestic 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 dramatic election seasons.

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.

What Can You Do About Risk?

Unfortunately, it’s not as simple as telling your advisor you feel comfortable with “moderate” risk. Everyone has their own risk tolerance level, based on their age, life circumstances, and time horizon. The key is using a quantitative approach to pinpoint how much risk you are comfortable taking, how much risk you need to take to reach your goals, and how much risk you currently have in your portfolio.

Finally, using a tactical approach to your portfolio could also help mitigate risk. Such a strategy would try to identify when the markets or your investments have a high probability of declining. Then act accordingly to reduce the risk of loss, rather than passively following the market downward.

That’s where an experienced advisor comes in and can make a world of difference. My goal is to help you discover your risk limits before you’re overcome with fear and tempted to panic. I’d love to chat with you, talk through your goals, and help you create a Life By Design Plan so you can pursue your dreams while working within your personal risk level. Contact me at (613) 447-1770 or yusuf.osman@gmii.ca​.

About Yusuf

Yusuf Osman is a Financial Advisor at Global Maxfin Investments Inc., an independent full-service financial advisory firm dedicated to helping clients create financial freedom, security, and peace of mind. With over 30 years of experience in the finance industry, Yusuf is committed to educating, engaging, and inspiring as many people as possible to take control of their finances. He spends his days developing a thorough understanding of his clients’ lives, concerns, and dreams to help them build a financial plan that keeps pace with changes in both the markets and their lives. Yusuf graduated from the University of Ottawa with a bachelor’s degree in Science and earned an MBA in Finance from Queen’s University. To learn more about Yusuf and his Dynamic Wealth Program for Women, go to Dynamic Wealth Program for Women | Dynamic Wealth.

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(1) https://www.investopedia.com/terms/l/loss-psychology.asp