Monument Resource Center

Our clients hire us because they recognize the value of our Team’s unique, straight-forward, unfiltered opinion and our tailored advice designed to answer their questions, not everyone else’s. Below, you’ll find some of the most important questions we have been asked over the years to help you better understand the role we play and the advice we give.

Is Your Advisor Letting You Take on Too Much Risk in Your Portfolio? Here’s How to Tell.

As a Private Wealth Advisor, it’s my job to ensure our high-net-worth clients aren’t over-exposed to risk in their portfolios. It’s very easy to get in a position of taking too much risk. For example, a human tendency known as recency bias can drive you to chase higher returns, especially during long bull markets. The problem is, you could be gambling on your future and not even realizing it.

Whether you crave the adrenaline rush of a payout from a risky venture or prefer to store your spare cash under the mattress, there’s more to perfecting the risk level of your portfolio than simply aligning it with your feelings. And if the recent market volatility in the news has you second guessing things, you’re not alone. Luckily, you don’t need to be an expert to tell if you’re taking on too much risk – we’ve identified the biggest red flags that it’s time to adjust your risk exposure. Read on to see if any of them show up in your investment portfolio.

Here are 3 red flags that you may be taking on too much risk in your portfolio:

#1. You don’t have enough cash

You’ve heard us say it before because, well, it’s just good advice: having cash on hand is the best way to protect yourself from the risk of needing to liquidate assets in a down market. As a certified financial planner™ professional, nothing pains me like seeing someone pay a premium that could (and should) have been avoided. And the premium you pay for not having cash when you need it is a BIG one; when you take cash out of your portfolio during a market pullback, you’re locking in losses and losing your opportunity to recover.

While there’s no magic one-size-fits-all number when it comes to the right savings amount, best practice is to keep at least 12 months’ worth of living expenses in cash, plus enough to cover any large purchases you’re planning in the next 18 months. So, if you find yourself with less than 6 months’ worth of cash set aside – or worse, an advisor who doesn’t ask about your cash plans or needs while managing your investments – consider it the first red flag that you’re over-exposed to risk.

#2. You have a concentrated stock position without an exit strategy

I can’t tell you the number of smart, high-earning executives I’ve encountered who didn’t realize the accumulation power of their stock compensation. You know those company stock bonuses you’ve been grumbling about for years? The ones that have *finally* started vesting? Well before you know it, you can find yourself with a larger percentage of your net worth tied to your employer than you meant to. Or maybe you just really like Apple. Or that one obscure biotech firm that you just know is going to change the world one day. There’s nothing wrong with having conviction in a company, but how can you tell when enough turns into too much? Let me give you an example. I once spoke to an executive with a net worth of roughly $12 million, with about $7 million tied up in company stock and options. When the stock price went down, it resulted in a million-dollar movement in their net worth figure in less than a week. Yikes.

So how much is too much? 10% is a good threshold to keep in mind. If more than 10% of your portfolio is invested in a single stock without an exit strategy in place, it’s a red flag. Why? Because unnecessary concentration risk can wreak havoc on your financial security without warning.  Work with your advisor to make sure you’re not over-concentrated and that you’re making the most of your stock compensation. For example, your advisor should guide you through the timing of selling your stock, so as not to accidentally disqualify you from certain tax benefits.

#3. Your risk tolerance and portfolio risk level don’t match

This one can be a really tough one to get right.

Time and time again, investors are their own worst enemies when it comes to successful long-term outcomes. In a world where the news constantly bombards us with noise, it’s all too easy to let the anxiety of current events eclipse our big picture – but even though making reactionary decisions might feel good today, this practice can detrimentally impact your wealth in the long run. If you find that watching the news leaves you scrambling to do something, anything to regain the feeling of control over your portfolio, then you’ve encountered one of the biggest red flags of all: your risk tolerance is lower than your portfolio risk level.

There are two components of risk profiles: your risk capacity and your risk tolerance. Your risk capacity is how much risk you can afford to take, while your risk tolerance is your emotional ability to tolerate risk. It’s possible to have a really high-risk capacity, but a really low risk tolerance. Let’s say you have a very high-risk capacity because you have the assets and time horizon to support it, but you agonize and lose sleep over market fluctuations, causing you to deviate from your investment plan. This means your portfolio risk level is higher than your personal risk tolerance. Bottom line: since actions (or lack thereof) drive our outcomes, it’s best to keep your portfolio risk level in line with your risk tolerance even if you have the capacity to take on additional risk.

Help! My portfolio is raising so many red flags it may as well be the Running of the Bulls…now what?

It can be easy to ignore the red flags of risk when the markets are thriving, but when things go awry you may find yourself further from the safety of shore than you’re comfortable with. But there’s no need to panic!

If after reading this, you’ve identified that your portfolio needs a tune-up, it’s not too late to reign things in and get back on the right track. Ask your advisor for a risk review to determine the level of risk you truly need to take to support your goals. And, as always, ensure you have enough cash on hand in the event of a downturn.

Are you getting good advice that’s helping you evaluate your risk tolerance and keeping your wealth goals on track? If not, we can help.  Take 30 seconds to see if we’re a good fit.  

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Heaven L. photo

Heaven L. Goodwin, CFP®

Private Wealth Advisor

Heaven hails from the great state of Nevada. She grew up in a Las Vegas suburb then moved to Massachusetts for her high school years. With a fascination of epidemiology, Heaven began studying Public Health at Tulane, where in her spare time she tutored underprivileged kids. This experience in New Orleans, post-hurricane Katrina, hit her hard—and inspired her interest in economics and more specifically, becoming a financial planner. This is when Heaven’s career ....

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