Risk vs. Reward: Lessons Learned

In the crucible that is COVID-19, there are lessons to be learned. We have collectively faced many challenges over the last 12 months, but the focus of this piece will be using the pandemic as an opportunity to reevaluate one’s finances. Risk takes on many forms in the investment world. The most visible and easiest to understand is the volatility that occurs on the bottom line of one’s account statement. We all like to see our account values go up, and we don’t necessarily think about the risk it took to get there; in fact, sometimes we don’t care.  That is until the other side of the coin presents itself and your portfolio takes a hit. This past year has us re-evaluating many things in our life.  For the sake of your financial future, the following considerations should be made with regards to your finances.

First, an evaluation should be done of your entire financial picture. Don’t stop at your investments. Assess insurance coverage. Quantify debt to equity. Run some retirement projections. Identify opportunities for improvement. If you are already retired, look at your budget and withdrawal rates. It is easy to get caught in the hysteria of daily fluctuations in the stock market but viewing the entire picture can provide peace of mind or a better idea of where to focus efforts moving forward. 

Next, examine the risk in your portfolio. Ask what types of risk you are taking. Are you concentrated in a certain style, sector, or region? Is there enough diversification in your portfolio? While markets are green, it is easy to say that a certain level of risk is appropriate. What happens during events like March 2020 gives a taste of what true risk tolerance is. We have all heard the axiom that more risk equals more reward. A slight, but necessary, adjustment to that statement is that more risk equals the potential for more reward. That’s the nature of risk. If it were guaranteed, it would be a CD at a bank. History was written in such a way that markets immediately bounced back, but there is no guarantee of that occurring in the future. 

Finally, focus on things within your control. Unfortunately, we have no way of controlling what happens in the stock market. We can, however, control how much we save on a regular basis. Investment returns are the sizzle, savings rates are the steak. For those still in the accumulation phase of their career, savings rate is much more important than rate of return. For those already in retirement, spending rate is where to focus. A financial journey is a never-ending process and having an objective second set of eyes can help with all the above.