How Much Risk is Too Much?

investing risk

Famous days live in history. February 5 and February 8, 2018 may be among them, for those are the two days in one week when the Dow dropped over 1,000 points, down over 10% from its previous highs, officially marking a stock market correction.

We all knew it was coming. The stock market has been in a general upward trend since 2009. Newspapers, magazines, and all those talking heads on television kept warning us that stock valuations had gotten dangerously high. That inflation was rearing its ugly head. That interest rates were headed up. That we were overdue for a correction. Despite all this, investors poured a record $24 billion into stock funds in the first week of 2018. And many of them saw their accounts nose-dive in February.

So what did you do? Did you try to get onto your online account to sell something? Many online providers were overwhelmed with customer volume on those days, and accounts could not be accessed. Maybe you couldn’t do anything, even if you desperately wanted to.

Or did you just take a deep breath, recognize that something that everyone thought was coming had finally arrived, and realize there was no need to panic?

If your portfolio is carefully structured to manage the level of risk you are comfortable with, then you probably told yourself to stay calm and waited for some good buying opportunities. If you panicked, then you probably have too much risk in your portfolio.

In my financial thriller Money Grab, advisor Robbie Bradford talked about a client who ignored risk, despite her warnings:

He had his money concentrated in a few high flyers his golf buddies kept bragging about. I’d been after him for months to sell and lock in profits, kept telling him that trees don’t grow to the sky. But he wouldn’t listen. Said there was plenty more upside. And now he blames me.

Take the time to review your portfolio. Know what you own and why. Make sure your asset allocation (the percentage amount you have invested in stocks, bonds and alternate investments) is appropriate for you to achieve your financial goals. If you’re not sure how to do this, consult your financial advisor.

The stock market will always have strong upward runs and major corrections. Just make sure you are positioned to take advantage of the upside, as well as to protect yourself from devastating losses on the downside. Don’t take on more risk than you can stomach. If you were panicking on those two days when the Dow dropped a thousand points, then you probably need to make some changes in your portfolio.

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