A Newfound Appreciation for Risk

Given the lightning speed with which we’ve seen the market both decline and recover in 2020, there’s been every opportunity to feel the full spectrum of investing emotions. From despondency to euphoria, we’ve felt it all.

Considering this, many investors may now be wondering if the market’s near round-trip is the perfect chance to realign their portfolios based upon a newfound appreciation for what risk is. After all, barring any dramatic investment changes, most portfolio balances probably don’t look much different than they did just seven months ago, which, all things considered, is astonishing. Usually, discovering your true risk tolerance during a bear market is expensive tuition, but the 2020 edition is closer to the cost of community college.

If 2020’s market action has you freaked out, but you’ve managed to hang on so far, here are some things to consider before altering any investment plans:

It’s normal to feel emotions about your investments.

If you haven’t worried about your stock investments at all this year, you’re either lying, a robot, or not taking nearly enough risk. In hindsight, it would be very easy to pretend the market never worried us, but that’s a useless tough guy act. We are supposed to be worried about stocks occasionally – that is quite literally the reason we expect to earn a better return on them than cash or bonds. However, the key to what I just said is the word, “occasionally”. If the market move during February and March impacted your quality of daily life, that’s probably a signal to reassess.

What is the reason for your investment allocation?

If there was never a rhyme or reason to your investment mix before 2020, and the drop earlier this year had you worried sick, now is a great time to get a grip. As the wise Nick Murray says, “A portfolio is not, in and of itself, a plan. And a portfolio that isn’t in service to a plan is just a form of speculation.” Determining why you are taking risk to begin with, and to what degree, is an integral component of the financial planning process. If you go through this process and discover that you were taking more risk than required to meet your goals, then, by all means, use this as a chance to make adjustments.

Are you willing to make other adjustments?

So you’ve gone through the planning process, and the reason for your current investment allocation is because your financial plan requires it. You’re not out of options yet. If you’re still accumulating, are you able to save more? If you’re living off your investments, can you enjoy life on less? What about some combination of those two, in conjunction with a minor adjustment to your investments? Life is all about trade-offs, and, in financial planning, there are often multiple levers to pull. In a perfect world, every financial plan would require no more investment risk than its owner is capable of bearing. Short of that, it’s better to invest in a lower risk portfolio you can handle than it is to invest in a high risk portfolio you’re constantly spooked out of.

If you’re feeling like 2020 has given you a cheap “do-over” with your investments, you’re not wrong. Just make sure any changes you make are for the right reasons.