When You Cannot Control Risk, You Try to Manage It

This is a tag line I use daily. I also write many blogs on this. Every day we manage risk, sometimes without realizing it. We buy insurance, wonderful way to manage risk. We purposely invest in cash to control risk, good and bad way to manage risk. We choose not to participate in certain activities, this is how I manage risk!
Let’s talk about managing financial risk. Why now? Well because I recently wrote a blog that encouraged you to not panic with market volatility, but this is contingent on maintaining appropriate risk.
Most know that you manage investment risk using asset allocation and diversification. Great, you are part of the way there. This only works though when the allocation and investments are appropriate to your risk tolerance and investment horizon. Here is a real-life example, we set money aside to purchase a home, created a separate account and told our advisor the purpose of the funds. Our goal was principal preservation and Investment income, and if that was the case, we should have invested in a money market fund. We were not, and I blame the advisor and myself for not providing as much oversight as I should have. So, when a global pandemic came along, the money not appropriately invested lost principal. Although this has an almost happy ending, it was a tough couple of months. We fired the advisor, and it taught me an important lesson that I now share with clients, risk profile matters, time horizon matters, and even if you pay for an external manager, good dialogue with external managers matters. Document discussions, mistakes often are not bad managers but poor communication. Here are good questions and discussions to either ask your manager or yourself if you are the manager. Do not forget about your 401K, for many of my clients this is their largest pool of assets, which many self-manage.

1. What is the purpose of the funds? Document this including expected time horizon and note expectations, such as principal preservation, growth, tax efficient, etc…
2. What is the portfolio allocation, what percentage is in stocks, what is in bonds?
3. What are the best/worst years of historical performance for this allocation?
4. Do you need any liquidity for the funds?
5. How has this portfolio performed relative to widely accepted benchmarks? Make sure you look at this over time, multiple time periods. Also look at 2021 performance, how did the portfolio do in an up year, and in 2022, how did the portfolio do in a down year?
   These are a couple of items to think about as you access your financial risk. I have put together an investment review template that clients have found helpful. Happy to share if interested.
   We often think about returns as how much did we make, it is equally important to consider, how much did we or could we lose?
   When you cannot control risk, manage it.