By Daniel Korleski, MBA
Pandemics, social upheaval, market volatility, international unrest, oh my! If you read news headlines, it may feel like our world is spinning out of control, which can cause you to panic and experience a whole lot of emotion. For many of us, one of our first thoughts in uncertain times goes to our finances. We worry about our investments, our income, and maintaining our lifestyle, and we’re likely tempted to go into protective mode. 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 do we do this in a way that doesn’t strike fear into our hearts?
Enter Riskalyze.
What Is Risk?
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 absolutely 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 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 Do I 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.
At Cobalt Private Wealth, we use Riskalyze, an online tool based on Nobel Prize-winning research that gives you your personal risk number. Then, using your personal risk number as a foundation, we gather info, look at the facts, and build a portfolio that is right for you. It’s a way to give consistency and direction to your financial plan. Knowing your risk numbers helps us guide you toward a portfolio you can hold fast to when the road gets rough or when permanent loss stares you in the face. Give it a spin right now!
Our goal is to help you discover your risk limits before you’re overcome with fear and tempted to panic. We’d love to chat with you, talk through your goals, and work toward your dreams while working within your personal risk level. Reach out to me at danielkorleski@cobaltprivatewealth.com or 719-332-3863 to schedule an introductory meeting.
About Dan
Daniel Korleski is the President & CEO for Cobalt Private Wealth, where he helps his clients grow, manage, and protect their wealth so they can work toward a stronger financial future. With over 30 years of experience in the financial services industry, Dan has served as the managing director for Investment Trust Company, chief investment officer for the Wealth Management Group at American National Bank in Denver, and regional investment manager for the Greater Colorado Region of the Private Bank at Wells Fargo, where he oversaw the management of over $2 billion. In 2008, he was appointed by the mayor of Colorado Springs to the City’s Investment Advisory Committee. Dan holds an MBA in investment management from Midwestern State University in Wichita Falls, Texas, a Bachelor of Science in Finance from Florida State University, and is a member of both the CFA Society Colorado and The Financial Planning Association.
Dan loves to give of his time to his community and has served as Chair of the Board of Trustees of Pikes Peak Hospice Foundation, the Board of Directors of Catholic Charities of Central Colorado, President of the Broadmoor Rotary Club and Vice President of the Board for the Pikes Peak Chapter of Trout Unlimited. Dan was born and raised in Spain and is fluent in Spanish. When he’s not working, you can find him traveling around the world with his wife of 23 years, Montse, fly fishing, golfing, and hiking with his golden retriever, Curro. To learn more about Dan, connect with him on LinkedIn.
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(1) https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/loss-aversion/
