Taking Too Much Risk

Not timing the markets is one thing. Another mistake is having too much risk in your portfolio. Risk involves the chance that the investment you choose will perform differently than you anticipate.5

During the bull market days of the mid 1990s and early 2000s, money poured into equities-often into risky tech and internet stocks.6 The value stocks trading low had many of their investors fleeing toward higher returns.7 When a bear market followed 9/11, the bottom fell out of the tech sector; meanwhile, many value stocks weathered the storm.8  Investors who took on too much risk-not wanting to miss out on the dot-com boom-most likely saw their portfolios take a severe beating.

Portfolio risk can be insidious. Holding a diverse mix of stocks, bonds, and alternatives may seem adequate for managing risk, but it’s just one component. If you correlate these investments-meaning they move in similar patterns-then you could jeopardize your portfolio. If the investments respond to market declines all in the same way, you may increase the risk of losing all your money.

The objective is to take on the amount of risk that still aligns you with your long-term goals. When evaluating your portfolio, ask yourself these questions:

  • Are you too heavily invested in one asset class, sector, or geographical region?
  • Do you hold too many alternative investments?
  • Do you hold many of the same investments or overlap too much?
  • Is your portfolio correctly structured for your long- term goals, investment horizon, and appetite for risk?