Is Managing Risk Sexy Again?

Well...with the Great Tariff Scare behind us (for now), I'm noticing more folks reconsidering the importance of managing risk in their portfolios. Not surprising. We may have dodged the tariff bullet for now, but market volatility still exists. So, is managing risk suddenly sexy again??...No... but frankly, it's overdue.

The bull market of the 2010s and the steep recovery after COVID made people a little too comfortable with investment risk. Sure, it's appealing to chase returns of 9% or 10%, but with that kind of return potential, you better be ready for a -20% or more potential drawdown in any given year.

When it comes to managing investments, I strongly believe in steady, dependable progress. This comes with a primary objective of maintaining manageable ups and downs rather than taking risks that might lead to those significant setbacks. But how exactly do we - as client and advisor - handle risk in a way that actually makes sense?

It starts with genuinely understanding your risk tolerance. There are different ways of doing this - I've even heard of advisor asking, "how fast do you like to drive?" as method to gauge risk tolerance. This is total garbage. Your financial future deserves better. If your advisor still relies on superficial methods like these, you might want to reconsider who you're trusting with your hard-earned savings.

Real risk tolerance means honestly assessing how much investment risk you can genuinely endure. Advisors typically approach this in two ways:

1. Historical Crash Simulations: Sometimes you'll see how your portfolio would have fared during the Great Recession. But, honestly, imagining a 30% - 50% loss doesn't usually help - it mostly just scares people into avoiding investing altogether.

2. Comprehensive Stress Testing: A better approach is to examine how your portfolio performs through various scenarios, from the Dotcom bubble to the bull market of the 2010s, and even the recent inflation spikes, and interest rate hikes. This method gives you a clearer, more realistic view of your comfort with different market conditions.

   
   

For those who like a deeper dive, we'll explore metrics such as the Sharpe Ratio, Treynor Ratio, Standard Deviation, and Beta. These aren't just technical jargon - they're tools to measure precisely how your investments balance risk and reward.

Another critical aspect to consider is the very real financial risk you're taking by avoiding investment risk entirely. While playing it safe might feel reassuring, being too safe could mean being unable to have the retirement lifestyle you envisioned, possibly going back to work, and even potentially running out of savings entirely. We call this "Retirement Failure" and is something far too common among farmers who sell for their retirement.

Ultimately, investing involves accepting that risk comes in two forms: potential short-term volatility through market investments or avoid market investments and run the risk of falling short of your long-term goals or not living up to the expectation.

The key question is: are you more comfortable riding out some market fluctuations in pursuit of growth, or would you rather avoid market stress, even if it means risking your future financial security?

Given the recent market ups and downs, now is the ideal moment to revisit your risk tolerance.

Let's talk openly and honestly about your real comfort level and find a strategy that genuinely aligns with your financial aspirations.

Jose Alvarez

Founding Advisor

Harvest Horizon Wealth Strategies

The information presented in this blog is the opinion of the author and does not reflect the views of any other person or entity unless specified. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services are offered through Harvest Horizon Wealth Strategies LLC, an investment adviser registered with the state of Wisconsin.